We should have seen collapse coming

The financial tsunami hit close to home last week. University employees woke up to find Lehman Brothers in bankruptcy and American International Group teetering on the brink of collapse.

Workers sent frantic calls to the human resources department wondering if their annuities were about to be axed.

Their fears were allayed when Kitty McCollum UNC-system General Administration's vice president for human resources sent out a letter stating that employee annuities were held in a subsidiary — Variable Annuity Life Insurance Company — that was subject to strict regulatory oversight. AIG is required by Texas insurance law to maintain adequate reserves in the event of payouts.

UNC staff dodged a major bullet. Needless to say many of your parents' 401(k)s and retirement savings are probably suffering. These are hard times.

As we continue to go about our daily lives in Chapel Hill we are watching a tectonic shift unprecedented since the Great Depression take place before our eyes.

Home values have dropped to levels not seen since the Great Depression according to the liberal Center for American Progress. Middle class families are seeing built-in equity wiped out. 

This week we also witnessed the demise of the remaining bulge bracket firms. Goldman Sachs and Morgan Stanley have become bank holding companies. Merrill Lynch was bought out by Bank of America Bear Stearns was acquired by J.P. Morgan and Brothers went bankrupt.

Financial elites no longer talk about the benefits of limited regulation. The bailouts of Fannie Mae and Freddie Mac along with AIG have demonstrated that our government will continue to be the lender of last resort.

If many of the leading firms on Wall Street hope to survive then they will need the federal government's support to take toxic mortgage-backed securities off their accounting books. The alternative is a financial meltdown caused by a sclerotic tightening of market liquidity. Not a pleasant option.

One of the fundamental reasons behind this entire meltdown is that investors believed models that calculated the probability of plummeting mortgages to be next to impossible. After all this hadn't happened since the Great Depression so why would it happen now? They should have followed up on their history.

Models developed by Long-Term Capital Management a hedge fund that counted on the advice of two Nobel Prize winners in economics" made disastrous bets on how Russia's debt default would impact market liquidity. The risk of Capital Management's collapse was so significant that it forced the Federal Reserve of New York to organize a buyout. Sound familiar?

The U.S. Treasury secretary has proposed an estimated $700 billion plan to take ""bad"" investments off corporations' balance sheets. We are about to subsidize corporations for terrible investment decisions while our parents' retirement savings are going through the gutter.

We preach the values of the free market but when push comes to shove we won't let our businesses stomach their own losses.

History has shown us that these crises reappear in one form or another every decade around the world. Each time we seem to forget some very simple lessons regarding regulation. It's time we started opening up those textbooks.