What is the cause of current financial meltdown? Understanding the root cause is necessary before we can solve our current financial crisis. It is also critical to avoid repeating such a crisis in the future.

It is tempting to paint with a broad-brush deregulation by demonizing deregulation as a concept. Blaming our crisis on deregulation is simplistic and dangerous. If we don't distinguish deregulation of Wall Street and deregulation of Main Street, the cure might be worse than the illness.

REGULATING AS A CONCEPT
The "market" is individually selfish and collectively not "socially driven"; the market is a genuine natural phenomenon that is socially beneficial under certain conditions and those conditions are not laissez faire and is totally dependent on "Balance of Powers" throughout all levels and special interests of society, now "global" financial society. Regulations are needed to maintain a balance of power.

REGULATING WALL STREET
In 1929 Banks directly or indirectly lent over 95% of all money to consumers and business and stock purchases. In 1933 there were a number of regulations put into place in response to the panic of 1929 - notably the Glass-Steagall act. This act separated commercial banks from investment banks and formed the FDIC.

Banks could no longer book huge investment banking fees by lending money to unsuspecting investors to buy stock the bank brokering to the public. Often individual investors were buying shares promoted by their bank in companies that were also clients of the bank. Often the proceeds for sale of stock paid off a bad a loan made by the bank. This integration of self-serving interrelationships destroyed the lending discipline needed to maintain the integrity of our financial institutions. Accountability and consequences were lost.

Fortunately, the 1933 regulatory body of safe guards served us well for over 75 years. Wall Street was regulated.

DERGULATING MAIN STREET
Deregulation in most cases is clearly beneficial for Main Street. By taking regulatory burden off of small business. Small business creates far more jobs than fortune 100 companies produce and thus vital to the financial health of our Nation. Without question deregulation spurred innovation, economic growth, jobs and tax base. Deregulation that creates competition with larger companies is also beneficial. For example we no longer are saddle with old "black only" clunky phones compliments of MA-Bell. Their phones didn't change for thirty before deregulation. The explosion in choices of communication devices and lower costs are clear examples why deregulation can be beneficial.

WALL STREET MELT DOWN
What is the root cause of the Financial Markets? What happened; or more to the point, what didn't happen?

Wall Street continually innovates while Congress tends to continually vegetate. Washington tends to act only reactively and blame others for political sport. Over the last 25 years in particular Wall Street created a tidal wave or new financial instruments - in particular, mortgage backed securities. Meanwhile political parties on both sides of the isle consumed themselves with fighting parochial turf wars. Oblivious of the new securities and lending patterns, Congress did nothing. Worse, a recent study indicates that 86% of our Congressmen and women did not understand the implications of these new securities.

By 2008, 95% of the volume of capital that represented lending in one form or another ran through non-regulated institutions. Ominously, the securitization mania began to create securities of pools of securities in the name of risk management. This created layers of non-regulated investment lending against securities representing pools of other securities. Wall Street created paper with pools of paper. None of this activity was within the scope of regulations of the Glass-Steagall Act.

Lenders now could make loans and sell it, earn huge fees without risk. Then repackage these securities and sell them again as a new security in a pool of securities and earn huge fees again and take no risk.

DON'T BLAME DEREGULATION
Investing in securitizatized loans by non-bank banks¹ were not covered by Glass Steagall because in part this new form of lending and new lender groups didn't exist in 1933. We didn't regulate the new form of lending and the new financial instrument invented by Wall Street. Therefore, it follows: one cannot deregulate something that was never regulating to begin with.

BLAME GAME
Wall Street executives should have known better, but greed and market dynamics left unchecked and out of balance inflicted collective blindness. Our national leadership should have known better. Unfortunately Congress is consistently reactive to national challenges and largely ignorant of our history. I have no political leaning and wish not to pick on Joe Biden. However, the Senator is considered the most experienced and senior Statesman in the Senate. He is a good example of the problem with Congress. Yet recently Senator Biden sermonized in an interview about his plan to address the financial crisis. Senator Biden said, "I would do what President Roosevelt did in 1929. He went on TV to comfort the people and not to fear. It takes leadership to lead". Considering Roosevelt was not President in 1929 nor were there any TV's, Biden does not seem to know his history. If we don't even know our history much less learned from it, we will be doomed to repeat it.

THE ROOT CAUSE OF THE FINANCIAL MELT DOWN
Without both public and private responsibility, we get irresponsibility at all levels. We lost and accountability and consequences. This is the underling cause of our financial melt down. If our leadership does not focus on this underling cause we will not enjoy endearing solutions.

SOLUTIONS
Enlightened leadership need to distinguish between the wisdom to regulate Wall Street and the benefits of allowing Main Street the freedom and opportunity to flourish. Enlightened leadership need to focus on personal responsibility. Wall Street needs a balance of power through regulation to maintain accountability and consequences and accountability. Enlightened leadership needs to understand our history to effectively be proactive. Over-reacting with simplistic slogans and by demonizing deregulation, as a concept is a sure recipe for disaster by making the cure worst than the illness.

¹ "Non bank bank" is a technical governmental terms or designation that describes non regulated lending institutions that are not regulated by the FDIC.