Where Wall Street meets Pennsylvania Avenue

By Peter Gillette and Jay Kiedrowski

Last update: September 16, 2008 - 2:33 PM

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The latest news from the financial markets is bad. Merrill Lynch & Company is sold for pennies on the dollar and Lehman Brothers goes into bankruptcy. All of this after the emergency purchase of Bear Stearns Companies earlier this year and a capital infusion from the federal government for Fannie Mae and Freddie Mac two weeks ago.

This financial-industry turmoil is a major threat to our economy and its ability to create jobs that pay well. Unemployment is rising. Those with stock and bond investments in a 401k can see the negative impact.

The banking and investment industries have been inadequately regulated, and consumer protections were diminished. These industries were allowed to develop highly sophisticated new financial products with inadequate scrutiny. They were allowed to carry too little capital reserves for the inherent risk in their activities.

The Bush administration has taken pride in loosening oversight and reducing "unneeded government regulation." While the rhetoric is appealing, we are now seeing some of the results. The country needs sound regulation to prevent the financial industry from abusing its influence to the detriment of non-market participants.

Here are some examples of the "unintended consequences" of reduced regulation of the financial industry:

•A local home owning couple find that they can’t refinance an adjustable rate mortgage unscrupulously sold to them because the house is now worth less than the amount of the mortgage.

•A local nonprofit loses hundreds of thousands of dollars investing in a short-term bond mutual fund that, unbeknownst to the nonprofit, held sub-prime mortgage securities.

•A young hardworking financial analyst is told to box up her personal belongings because the firm she had worked for is closing.

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