KBL – certified public accountants and advisors

Wall Street crisis is culmination of 28 years of deregulation. No one cog in the federal government's machine of financial regulation let down the country by failing to prevent the latest shakeout on Wall Street. The entire system did. The job of regulators is that when the party's in full swing, make sure the partygoers drink responsibly. Instead, they let everyone drink as much as they wanted and then handed them the car keys. One Wall Street bank, Lehman Brothers, filed for bankruptcy protection and another, Merrill Lynch, sought comfort by selling itself to Bank of America for $50 billion. Earlier this year, the government helped enable the sale of faltering investment bank Bear Stearns to J.P. Morgan Chase, and more recently took over mortgage giants Fannie Mae and Freddie Mac. Such troubles were supposed to have been prevented, or at least mitigated, by regulatory systems that the nation began to put in place after the banking system collapsed at the start of the Great Depression.

Many banks at the time were badly wounded by their personal and financial ties to securities trading. The 1933 Glass-Steagall Act, and later the 1956 Bank Holding Company Act, mandated the separation of banks, insurance companies and securities firms.

Those and many other federal laws stabilized the banking and securities markets, but by the 1970s, a stumbling U.S. economy led to a change in America's political-economic values. Ronald Reagan led a movement that came to power in 1980 proclaiming faith in free markets and mistrust of government. That conservative philosophy has dominated America for the past 28 years.

Even after taxpayers had to rescue deregulated savings and loans, or S&Ls, with a $200 billion bailout in the late 1980s, the push to loosen regulation paused only briefly. In 1999, President Clinton signed the Financial Services Modernization Act, which tore down Glass-Steagall's reforms by removing the walls separating banks, securities firms and insurers.

Under President Clinton and his successor, the government became eager to promote home ownership. Interest rates were low, the market grew for loans to borrowers with weak credit and private-sector mortgage bonds boomed. About 38 percent of those bonds were backed by subprime loans. They are at the root of today's financial crisis.

A generation ago, banks, credit unions and S&Ls issued home mortgages that they retained on their books as an asset. The lenders had a stake in receiving full repayment of the loans from creditworthy borrowers.

But in recent years, mortgages began to be sold to firms that cobbled the loans together to create mortgage-backed securities, or mortgage bonds. Loans to the least creditworthy borrowers carried the highest risk but gave the highest returns, so banks and other institutional investors bought loads of them. Except no one was policing the creditworthiness of the borrowers.

The process helped more people buy homes, and a booming mortgage-bond market, led by investment banks, was in full swing by 2005.

When borrowers who had secured loans with adjustable interest rates, however, found their rates going up, many were unable to pay. That meant that holders of bonds backed by these mortgages were stuck with securities worth much less than their face value — or nothing at all. That created a solvency crisis for the banks that loaded up on them — and virtually all of them had.

Some regulatory agencies issued warnings, but credit-rating agencies still said that the bonds — and the banks that issued and bought them — were safe. It turns out, of course, that many were not.

With Congress eager to expand home-ownership, regulators felt pressure to deal lightly with mortgage loans to low-income households, and virtually no one proposed national regulation of non-bank lenders or mortgage brokers.

Had regulators questioned sub-prime lending, they would have been harshly criticized

Warning signs began to appear. At least nine federal agencies oversee some part of the mortgage market, and from 2004 to 2007, at least three had issued warnings about risky loans.

Still, none was willing to end the financial revelry. It was another example of an asset bubble that appears periodically. An economy will disregard risk, and when people see another investor making money by investing in an asset, others will throw caution to the wind. No one wanted to kill the goose that laid the golden egg.

As the U.S. government steps to the center of the financial crisis, crafting plans to take ownership of up to $700 billion worth of bad mortgages, a pair of simple questions rises to the fore: Will this intervention finally be enough to restore order? And what will this grand rescue cost U.S. taxpayers?

The Treasury Department, as overseer of the American financial system, has in recent weeks unleashed an astonishing array of initiatives in a bid to stave off catastrophe. It took over the country's largest mortgage finance companies and put untold billions of taxpayer dollars on the line to prop up other lenders.

Now, although the details are still being worked out, the government is dispensing with rescuing one company at a time, and instead taking on a vast pile of bad debt in one gulp. If it all comes to pass - if Uncle Sam becomes the repository for the radioactive leftovers of bad real estate bets - will the crisis lift? Will the fear that has kept banks clinging to their dollars, starving the economy of capital, give way to free-flowing credit?

There are many skeptics of the Treasury's proposal, though there is wide agreement that some kind of broad intervention is necessary.

But significant skepticism confronts the initiative. Under a proposal circulating, the Treasury could spend as much as $700 billion to buy mortgage-linked investments, and then sell what it can as it works out the messy details of the loans. But no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday.

Some question the prudence of adding to the nation's overall debt at a time when the Treasury relies on the largess of foreigners to cover the bills. Most broadly, what are the longer-term costs of the government stepping in to restore order after so many wealthy financiers have become so much wealthier through what now seem like reckless bets on real estate - bets now covered with public dollars?

Also, what message does that send to the next investment bank caught up in the next speculative bubble and contemplating the risks of jumping in while wondering who is ultimately on the hook if things go awry?

Many economists say such questions are beside the point. The United States is gripped by the worst financial crisis since the Great Depression.

When the Treasury secretary, the Federal Reserve chairman and leaders on Capitol Hill proclaimed their intentions to take over bad debts, the prognosis for the American financial system was sliding from grim toward potentially apocalyptic.

The government's plans are hashed out, no hallelujah chorus is wafting across Washington, down Wall Street or through the glistening condos of the United States. Too many households are having trouble paying their mortgages. Too many people are out of work. Too many banks are bloodied.

Still, the prospect that the government is preparing to wade in deep - perhaps sparing families from foreclosure and banks from insolvency - has muted talk of the most dire possibilities: a severe shortage of credit that would crimp the availability of finance for many years, effectively halting economic growth, both in the United States and around the globe.

The risk of ending up like Japan, with 10 years of stagnation, is now much lessened. The recession train has left the station, but it's going to be 18 months instead of five years.

If the plan works, it will attack the central cause of American economic distress - the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

For many Americans, the events that have transfixed and horrified Wall Street in recent days - the disintegration of supposedly impregnable institutions, government bailouts with 11-figure price tags - have been less stunning than inscrutable. The headlines proclaim that the taxpayer now owns the mortgage finance giants Fannie Mae and Freddie Mac, along with the liabilities of a mysterious colossus called the American Insurance Group, which, as it happens, insures against corporate defaults. Much like the human appendix, these were organs whose existence was only dimly evident to many until the pain began.

And yet these institutions are deeply intertwined with the American economy. When the financial system is in danger, it stops investing and lending, depriving ordinary people of financing for homes, cars and education. Businesses cannot borrow to start and expand.