With the nation's economic outlook improving, should the US Congress pass stricter finance regulations?

Yes

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by Robert Blevins

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In March of 2008, home foreclosures reached a staggering 7,800 a day nationwide. RealtyTrac says this figure (adjusted for current US population) is on par with the highest rate of foreclosures during the height of the Great Depression. By August of 2008, it had risen to 12,000 a day.

One year later, although there is talk of recovery, the situation is little improved. The current daily rate is running at about 11,000 foreclosures nationally, with Nevada being the worst, having a shocking rate of 56% of homes either in present or past foreclosure.

Although the current 10% unemployment rate and mortgage lenders re-adjusting their ARM loans are most of the reason for the current foreclosures, unregulated investment practices on Wall Street launched the entire chain of events years ago. Starting in the late 1990's and continuing through the Bush administration, freewheeling investment companies began assembling financial packages based on fraudulent or inflated property values. These are called 'Mortgage-Backed Securities', or MBS. They are much like a Treasury bill or a bank CD. You put in money, you get it back later with interest. In the case of MBS', this interest rate could be very high, and were tempting to purchase.

However, many of the mortgages used to back these securities were saddled with high-interest predatory loans, and chances were good that many people would eventually fall behind on the payments. For a while, it all worked anyway and people made money - as long as property values kept rising. That house you bought for $200,000 might be worth $220,000 the following year, and even more a year later. In some areas, such as Florida and California, rising property values skyrocketed to unbelievable levels. Many homeowners took out equity loans on their homes as a result, to pay off bills, go on vacations, or to upgrade the house.

Nevertheless, it was all smoke and mirrors. It started to collapse when property values plummeted, and then was completely devastated when the Stock Market crashed in late 2008. All of these securities became worthless paper overnight. Companies and individuals (some who did not realize they were invested in these shaky instruments) lost billions. Layoffs commenced, people lost their homes, and other companies closed completely. The disaster created by these irresponsible investment practices has been extreme, and it continues to dump misery on millions of American families.

When President Obama took office, the entire financial system in the U.S. was only days from total collapse, which is why he was forced to bail out some banks. Had he not done this, large companies would have been forced to close their doors. The ripple effect would have spread across the country and the misery would be far worse than it is now. For a while, the country was teetering on the edge of another Great Depression, which was caused in 1929 by the same thing as now: A poorly regulated financial system.

The only difference between 1929 and 2009 is that in 1929 the collapse was caused by selling stocks on credit. You could purchase stock in a company simply by making a down payment of 10% of the stock price. Millions of Americans did, which caused the value of stocks to shoot to the moon. Nevertheless, like the Mortgage-Backed Security idea, it eventually collapsed. In 1933, part of Franklin D Roosevelt's 'New Deal' was to establish the Securities and Exchange Commission, and one of their first actions was to outlaw the selling of stocks 'on margin'.

Unfortunately, as the financial system grew more complex in the 1990's, even the SEC was powerless to stop these investment companies from creating these ridiculous Mortgage-Backed Securities and selling them to the public.

In the first seven months of 2009, more than 2.3 million homes have been repossessed, had foreclosures filed, or have gone on the auction block.

The root cause of this mess is still with us. Wall Street investment companies must be reined in with stiffer regulations regarding investment packages and loan rules, or we invite a repeat of both 1929 - and 2009.

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