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Could another recession occur? What’s being done to prevent the next one?

Five years ago, the United States was rocked by yet another financial disaster – the collapse of Lehman Bros. This came on the heels of a tightening credit market, the housing crunch, struggling auto industry, and numerous large financial institutions that were on the brink of collapse.

Could it happen again? What’s been put in place to prevent another recession from occurring?

Some progress has been made, but not enough. The culprits are not unusual:

Red tape: Financial Regulation reform, known as the Dodd-Frank Financial Reform was designed to usher in a new era of regulation, prevent the Madoff schemes, limit the questionable investment products (mortgage backed securities), and ultimately stop corruption and abuses (which led in part to the recession of 2008 and 2009). It had the best of intentions!

In reality, this legislation has aggravated an already burdened financial system. There has been little or no reform, just more regulation and paperwork. Does it help the investor? Not yet. In fact, this legislation has provided few additional protections to investors.

Bureaucracy: The politics in government have gotten in the way of meaningful reform. Gridlock has slowed the process. The hot issue are health care reform and improving the economy NOT minimizing future recessions.

Uncoordinated Reform and Enforcement: There are numerous government agencies and stakeholders that are looking to better protect consumers. Unfortunately, it’s not always clear which organization is responsible for what area, which leads to overlapping regulations and confusion for investors. This isn’t just a US problem, it’s on a global scale!

Lack of Leadership: There is no organization that is looking at the whole picture. Each regulator has it’s piece, but who is looking at the big picture? Who is making sure that nothing is being missed? Is it ever possible?

Preventing another disaster is a very complicated issue that can’t be solved overnight. Reform to this magnitude can’t be judged as a failure just yet. It needs a thoughtful approach, not a knee-jerk reaction. An over-reaction could lead to over-regulation and that can be almost as dangerous as a lack of regulation. The right balance needs to be developed.

We are on the right path. A path that will ultimately help the investor, but the path is long and we’ve only just started. The headwinds we face will probably be overcome, we just don’t know when.

We will always have to worry about recessions. Hopefully, we will eventually have something in place that will protect investors from events that led to the recession of 2008 and 2009.