Column: Stock Market Woes Necessitate Regulation

This story was written by Allan Acevedo, The Daily Aztec
The markets may be crashing and the banks are being bought up, but don't panic, at least not yet. Remember, we're still not technically in a recession.

On Sept. 15, we saw the start of the biggest financial crisis in years, and it's all the result of decreasing bank regulations. The Lehman Brothers, a major investment and banking firm, filed for the biggest bankruptcy in recorded history. It was later announced that Bank of America would buy out Merrill Lynch. The Dow Jones Industrial Average was down 504 points. That's the biggest single-day decline since the market reopened after the attacks of Sept. 11.

After the government bailout of Fannie Mae and Freddie Mac, both mortgage juggernauts, the nation's shaky financial and housing sector is scaring away investors.

American International Group, the nation's largest insurance company, has panicked at a series of credit rating downgrades. Over the last nine months, AIG has lost more than $18 million. The state of New York allowed AIG to transfer $20 billion in assets to use as collateral for their daily business, and the Federal Reserve asked Goldman Sachs and JPMorgan Chase to make $70 to $75 billion in loans available to AIG, according to The Wall Street Journal.

So let's just admit it: now really is the time to panic. Former President Ronald Reagan's economic assurances are never around when you need them. It looks like we have rightfully stopped believing in the "magic of the marketplace." And it's also time we realized that, left to their own devices, markets will not regulate themselves.

For months now we've been hearing about the mortgage foreclosure crisis. Over the last few years many people went to banks to ask for loans. A good percentage of these people, however, did not understand how the loans worked.

The details can get complicated, but the basic gist is that there is a difference between a fixed rate mortgage and an adjustable rate mortgage. With a fixed rate mortgage, the payment is the same for the entire term of the loan. With an adjustable rate mortgage, the interest rate can change, causing the monthly payment to increase or decrease. One month the required minimum payment may be $1,800 and the next month it could be $2,100. It's easy to see how this could decimate a monthly budget.

During the housing boom, many borrowers went in on loans with rates that were not fixed, because the interest rate they were being quoted at the time was a lower "introductory rate" and the bank representatives they were talking to assured them they could make the payments.

But as soon as the introductory rate ended and the economy started to tank, interest rates climbed. Borrowers found they couldn't make their payments, forcing them to default on their loans. Lenders have been firm and most don't allow refinancing. Foreclosure filing was the only answer and for many, this goes hand-in-hand with bankruptcy.

With all the foreclosures, banks end up owning countless homes. But with the current housing crisis, they can't sell the home for the amount it was initially loaned out at. So even if a house is sold, the bank will lose money on it.

Multiply this situation by however many millions of people have lost their homes, and it's no wonder we're in an economic cesspool that just feeds on itself. With so many houses on the market expected to foreclose, our economy is in a stalemate.

In 2007, close to 1.3 million properties around the country were in some form of foreclosure activity. This illustrates why the government must step in and provide more protections for potential borrowers hoping to buy their first home.

Predatory rates and loan incentives - in conjunction with rising housing prices encouraged borrowers to sign on for difficult mortgages with the belief they would be able to quickly refinance at a more favorable rate. The process was not properly explained to borrowers, leading to the deficit we now find ourselves in.

Even Sen. John McCain finally understands. Ten years ago he was a staunch supporter of deregulation, but now he says he's for regulation to end "reckless conduct, corruption and unbridled greed" on Wall Street.

All of this could have been avoided if the banking industry was subject to more regulations. In the 1980s, Reagan promoted deregulation, claiming that the economy would work itself out. That strategy has been continued in recent years, and now you're looking at the results. Regulation can be a scary word, but it's very simple. All we have to do is prevent individual borrowers from getting into messes like this because of deceptive loaning practices.

The government should have stepped in earlier and taken preventative measures. The money we need now to bail out the failing banking industry far outweighs the money we would have spent in enforcing regulatory laws in the first place.
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