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

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

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

But when the market stopped rising, stockbrokers started calling their clients to let them know they needed to put up more money. Some might sell stocks to cover their accounts, but when every brokerage firm contacted all of their clients with the same message, it was like yelling 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 pain.

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

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

More and more people started to enter the housing market and borrowed 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 in fact.

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

Some came up with not-so-brilliant schemes that allowed them to take their money and leverage 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 bankers were allowed to become so highly leveraged is an important question, but what is much more important is to prevent them from doing it 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 Fed policymakers they should also get some of the credit.

Like the stock market of the 1920s when stocks kept going up it wasn’t a problem until they hit ridiculous prices and the same thing happened with house prices in the years before 2008. The ending was joyous as looked like. as if you couldn’t lose, but the next release was quick and very painful.

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

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

Now politicians and leaders 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 That biggest problem is 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 that suggest we are likely to avoid another depression with the economy at the bottom and it looks like 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 should focus on the fundamental 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 leveraging themselves over their heads, which could bring them down and nearly drown the entire global economy, should be the focus of changes.

Leverage caused the stock market crash of 1929 just as 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 in rules and regulations, but even though they 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 gets 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 trying to prevent it is critical, as no one wants a repeat of the stock market crash of 1929 or the economic collapse 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 these painful events occurred and also the key to reducing the risk of their recurrence.