Although many years separate these two painful events, the common denominator of what caused both is the same.

In the 1920s you could put in a dollar and buy ten dollars worth of stock. This type of leverage is fine when the stock market rises, causing stock prices to rise and also a lot of confidence in investors who felt they couldn’t lose.

As the stock went higher and higher, it seemed that they were correct.

But when the market stopped rising, the stockbrokers began calling their clients to inform them that they had to put up more money. Some could sell stocks to cover their accounts, but when each brokerage firm contacted all of its clients with the same message, it was like shouting fire to a packed theater. With all these people trying to sell everything at once, the price drop was very fast and severe.

Not only did the stock market crash, people also feared for their money in the banks and when the crowds went to withdraw their money, the run on the banks caused more economic problems.

Now fast forward around 80 years and replace over-leveraging in stocks with over-leveraged banks and lots of people speculating on the real estate market. Furthermore, with interest rates at historically low levels, taken together, these problems conspired to drive house prices to absurd levels.

In the years before 2008, people had been conditioned to believe that you couldn’t lose money in real estate. Not only does the average person believe this, but banks seem to believe this too.

More and more people began to enter the housing market and borrow more money to buy a bigger house, some also bought an investment property and others built a portfolio of investment houses.

Well, clearly these weren’t investments at all, more like casino bets, big bets indeed.

New entrants in the mortgage business also played an integral role in driving home prices up, as it allowed more than just banks to offer mortgages. This added competition began to affect the banks’ profits, so they tried to find other ways to make money.

Some came up with not-so-brilliant schemes that allowed them to take your money and use it to try and make more money.

Unlike in the past, when investors were allowed to make a 10% down payment to buy stocks in the 1920s, these bankers only had to make a small percentage down payment.

Why the bankers were allowed to leverage themselves so much is an important question, but what is much more important is to prevent them from doing so again.

The combination of bankers leveraging their balance sheets and consumers leveraging their personal balance sheets are key reasons for the 2008 economic collapse. Record low interest rates were also to blame for the problem, so Federal Reserve policymakers they should also get part of the credit.

Just like the stock market in the 1920s, when stocks kept going up, it wasn’t a problem until they hit ridiculous prices and the same was true of house prices in the years leading up to 2008. The ending was joyous as looked like. like you couldn’t lose, but the next relaxation was quick and very painful.

After the great stock market crash of 1929, the government stepped in and tried to change a lot of rules and regulations and started up a lot of agencies to try to prevent a repeat in the future.

Some would rightly debate the effectiveness of all these actions, but one of the most important was the restriction of leverage. You could no longer put down ten cents to buy a dollar’s worth of stock and this is a very good thing.

Now, politicians and heads of government institutions are coming up with plans to try to prevent a repeat of 2008. One problem with their efforts is that they seem to be throwing around all sorts of ideas that sometimes make people lose sight of the Biggest problem being the leverage of bankers and consumers that drove home prices to ridiculous levels. This is the key issue that caused the recent economic collapse that brought back fears of another great depression.

Signs are emerging to suggest that we are likely to avoid another slump with the economy in the bottoming phase and it appears that a recovery will follow, leading to significant economic expansion.

But it wouldn’t be wise to ignore what just happened because it looks like we’re headed in a more positive direction. Instead, we need to focus on the root reasons that caused the problems and work on ways to try to prevent them from happening again.

Rules and regulations that prevent bankers and consumers from leverage above their heads that could bring them down and nearly choke the entire global economy should be the focus of change.

Leverage caused the stock market crash of 1929 just like it caused the economic crash of 2008, and reducing this risk is the most important problem to solve.

Banks and consumers have started to take advantage without any changes to rules and regulations, but even though these are systemic changes, they are still needed.

There is nothing wrong with leverage until it reaches extreme levels and that applies to banks as well as individuals. The new rules and regulations must be very strict to avoid excessive leverage.

Some will say that this makes the government too involved in the business of bankers and consumers. That’s too bad. Excessive leverage is too important and dangerous to politicize and it is critical to try to prevent it, as no one wants a repeat of the stock market crash of 1929 or the economic crash of 2008.

These two events were too painful not to learn, and the most important lesson they taught us is the ramifications of excessive leverage.

It’s not possible to totally eliminate the chances of future economic calamity, but it’s worth making it harder. Excessive leverage is the key reason why these painful events occurred and also the key to reducing the risk of them happening again.