The trend since the early 80's has been toward deregulation, not just in the United States but around the world. When a company is regulated, it must meet certain state or federal guidelines, usually in the amount of money it holds in reserve to cover its liabilities. For example, the insurance industry remains regulated. If, for instance, one pays $100 a month for his life insurance, the company can only spend $20 of that. The other $80 must be held to pay claims. The problem with regulation is that it tends to create a monopoly for those bigger companies who can meet the guidelines while still having enough profit to pay its employees and its operating costs. Smaller, start-up companies cannot compete, falling by the wayside.

The rationale is that deregulation removes those monetary requirements, thus fostering more competition which, in turn, leads to lower prices or easier terms.

One case with which we all are familiar is the deregulation of telephone service. Suddenly we were inundated with calls from every Tom, Dick, and Harry, wanting us to switch our phone service. Each one promised a better price than the next or promised more services.

In the mid-nineties, the banking industry began to demand to be deregulated as well. It had lots of money on hand and was anxious to find new ways to invest it in products that would allow it to make more money. At the time President Clinton signed the bill deregulating banking, no one envisioned we would be where we are today.

To understand what happened under deregulation, we have to grasp two concepts--how the banking industry operates from top to bottom and how banking practices changed after deregulation.

First, let's examine the banking system itself. Each of us receives a pay check because, if we are employed in private industry, our boss regularly borrows money from his local banking institution to pay salaries, and to purchase goods and services. His local bank in turn borrows from a regional bank while the regional bank receives financial support from an investment banker at the top echelon of the banking industry. Investment bankers do not engage in the day-to-day operations of a conventional bank,

They are men who generate their money primarily through investments. Generally, they buy huge chunks of business that seem to be good profit-making investments. They may choose to offer shares in the business on the stock market.

When the banking industry deregulated, that also had a profound effect on people's ability to borrow money to buy a home, a car, or to acquire a student loan for college.

Suddenly, mortgage companies were springing up on every corner, offering all kinds of "special financing" packages. People who would not have qualified under the old traditional loan guidelines now discovered that they could buy a home or a car---even with bad credit.

The conventional method of "putting people into homes" who had bad credit was to offer them an "interest only" loan or an Adjusted Rate Mortgage (ARM) loan. Usually these loans had about a three-year guarantee; then the ARM loan's interest rate was subject to an increase. The "interest only" loan became after the "honeymoon period" a traditional loan in which payments were based on both the interest and the principal--many times these loans were also ARM's.

Then the mortgage companies sold off big blocks of this business to investment banking houses or to conglomerates such as AIG. Envisoning huge profits, these firms often held no more than 3 per cent of their total liability on this business in reserve. .

Many of the investors who bought this business had limited knowlege in what they were buying or the impact that higher interest rates would have on the homeowners. In case after case, homeowners suddenly found that their interest rate had doubled (under regulation the bankers would not have been allowed to jump someone's interest rate from 7 to 14% per cent overnight.) But heh! No regulation! They could do what they wanted.

Many of these homeowners had purchased their homes during inflationary times in the early 2000's. When they tried to sell them, the market, already glutted with new homes, went soft. The homeowners began defaulting on these loans in mind-boggling numbers--they had no choice--they could not afford the exorbitant payment increase and they couldn't sell them for enough to cover their mortgage..

So where did that leave the investment banker? With tons of bad loans and huge stocks of homes that he couldn't resell for anywhere close to his liability, the investment broker found himself with more liability than assets. That translates to bankruptcy.

Local bank loans have nearly ceased as everyone waits so see what happens. Even with the bailout, hundreds of thousands of people will still be laid off. The bailout will keep the companies out of bankruptcy but money-lending will be extremely tight in the foreseeable future. Smaller companies may not be able to find the funds readily available to continue operating. The company for which Kenna and I worked is a typical example.

The reality is that the bailout,essentially government buying up the bad investments to keep these companies operating, will be a total waste if Congress does not put into place strong regulatory measures to keep history from repeating itself.