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Financial deregulation since 1980 unleashed a craving for adjustable rate mortgages (ARMs) by Wall Street’s five largest banking institutions. Once unleashed, the ARM craving artificially accelerated real estate prices, ending with the implosion now known as the Millennium Boom that brought the California real estate industry to its knees.

A dramatic 40% reduction in the capital adequacy ratio of these largest banks around April 2004 led to a competitive advantage frenzy among these banking institutions to directly acquire ever-more risky ARMs. Wall Street bundled the ARMs they acquired into investment pools, then sliced the pools into various levels of priority for investors to choose from, called tranches. These pools of mortgages were purchased as mortgage-backed bonds (MBBs) and sold to other banking institutions and individual investors, a process called securitization.

Among the nation’s five largest money handling institutions, loan securitization increased 32% after April 2004, according to data from FirstAmerican LoanPerformance.

While demand for mortgages peaked in mid-2005, Wall Street had perfected its expanded system for gathering, bundling and reselling mortgages through the MBB market to millions of investors worldwide. This peak in demand for mortgages was the result of a dried-up supply of financially able homebuyers. Thus, in order to satisfy Wall Street’s demand for mortgages to securitize, tenants-by-nature had to be enticed to become homeowners, and property owners of all sorts had to be motivated to refinance. The answer to both problems came with the use of ARMs. These loans provided low initial interest rates called teasers to qualify and very low payment schedule options for up to five years, with no verification of income necessary.

Financial deregulation is always dangerous. Banking institutions operate in an abstract world brokering U.S. dollars which are initially and exclusively supplied by the Fed to sustain commerce as a trusted medium of exchange so barter and its related labor complications are avoided. Until the 1980s, mortgage lending was subject to specific and fine-tuned rules crafted to prevent risk taking by bankers that jeopardize society and its institutions.

The government reins controlling money-lending institutions established after the Great Depression of the 1930s required government to harness the animal spirit of Wall Street’s competitive-advantage ethos. Letting the reins go (which has taken place continually over the past 30 years) has produced devastating monetary consequences throughout the world’s economies. Particularly hardest hit are California homeowners who are far removed from the inner workings of the time-honored money-printing system of central banks.

Private banking institutions must not be given the chance to gain a competitive advantage over their banking peers beyond reasonable parameters of risk taking set by the government. Any greater leeway given to banking institutions, as commenced in 1982 and continued with a vengeance by all facets of national government, allows private bankers to throw caution to the wind and pursue unreasonably risky money-making financial wizardry by merely increasing their bets through use of ARMs. Bankers know the government must always bail them out and cover their losses should they over-extend themselves and their businesses fail (as evidenced by the current bailout and the savings and loan bailout in the late 1980s, both the direct result of deregulation). It is for this over-reaching which regulation must exist.

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