By DR. LLOYD V. STOVER

I remember a thought-provoking Corporate Finance course I took in law school after WWII. Professor McKenna reviewed how we got to where we were than, and he made some amazing predictions about potential risks in the future. I believe all of us could benefit from his foresight.
We learned that during the 19th century, most public officials were comfortable doing favors for financial interests.  For example, railroad interests enjoyed spectacular subsidies, loans and tax exemptions at the national, state and local levels.

Then the Panic of 1907 occurred as a result of too much speculation and threatened to survival bankers worldwide. It was abated when J.P Morgan successfully assumed the role as the nation’s central banker.

President Theodore Roosevelt determined that the economy had become so complex and far-reaching that the control of investment capitol had to be removed from the uncertainties of speculative transactions and put, instead, into productive channels that will meet the material needs of all Americans. The initial answer was the Federal Reserve, established by President Wilson in 1913, as a quasi-public authority to regulate the country’s credit markets. The authority would be substantially influenced by the interests of the country’s principle bankers.

Then came the Roaring Twenties and the Crash of  ’29  and the Great Depression that followed. The result was Franklin Roosevelt’s “New Deal,” an assistance and rescue program  which vastly expanded the scope of national involvement in the country’s financial infrastructure.

The main emphasis changed to the regulation of national finances in the public interest. The Glass-Steagall Act regulated the stock exchange and created the Securities and Exchange Commission  and other measures that subjected the financial sector to rigorous public scrutiny. These measures lasted, in one form or another, until the 1980s.

I remember Professor McKenna reminding us that the 80th Congress (1947-48) began to unravel the New Deal regulations.  And the observant professor predicted that these trends were likely to continue and that “by the end of the century, a mess like 1929 could happen again.”  His prediction was only off by about a decade.

We have been bailing out industries and banks since the 1970s. The first major rescue was the Penn Central Railroad in 1970, closely followed by Lockheed; the Franklin National Bank and Chrysler followed a decade later.

When hundreds of savings and loans failed in 1900, President George Bush approved $300 million rescue package to cover their bad loans. Then, after Sept.11, the government approved billions for the already-troubled airline industry.

Beginning with the bailout of the savings and loan industry, there was a precedent that, under conditions of acute crisis, the federal government, would assume the risks taken by major financial institutions -- even if they had been irrationally speculative and wasteful -- and the burden of the risk would be born by the American taxpayers.

Throughout my lifetime, America’s national economy has transitioned from manufacturing quality products to providing services: primarily financial, insurance and real estate transactions.  Now, whenever it seems necessary, public support is provided to the banking/brokerage community to shore up the their bad investments.

Professor McKenna also predicted that business interests would manage to systematically  abandon the New Deal commitment to regulation.  Unfortunately, this has been the time when financial markets have become more complicated and less comprehensible to everyone -- making them even more in need of monitoring.

Now, the risks to investors, have been accompanied by spectacular awards to the promoters of even more complicated investment packages. And, there is the uncertainty as to which investment bank will be saved and which will be allowed to fall into bankruptcy.

I am reminded of Professor McKenna’s description of 1929 as a “financial system out of control.”  That’s an apt description of today‘s economic condition. The times now, as then, call for a new departure. The next administration, which will enter office under the greatest economic chaos since the 1930s, must confront new realities. Since the 1980s, the American financial system has progressively gotten out of control, resulting in a new era of failed speculation.

Now, like the time of the New Deal, we must re-regulate; but the problems we face today may be even greater than the circumstances that Franklin Roosevelt faced.  The new administration must figure out how to shift investment capital away from complicated high-risk speculative transactions and back to productive policies, expenditures and investments which will improve the overall conditions of our American society.

I remember that Professor McKenna prophesized that it would be likely within our lifetimes that circumstances similar to 1929 would happen again.  Now, I recognize that another Gilded Age is ending.  What comes after will be greatly influenced by how we vote this November.

Therefore, everyone should carefully consider how we got to where we are, and weigh the risks and benefits of establishing and maintaining an equitable financial system. Without executive leadership and financial; prudence, America might be facing another Crash, or, worse, another Great Depression.
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Dr. Lloyd V. Stover, an attorney and environmental scientist, may be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it