Revi­tal­izing the Amer­ican economy and reestab­lishing the public’s trust in our finan­cial system will require strin­gent gov­ern­mental reg­u­la­tions, according to chairman of the Finan­cial Ser­vices Com­mittee and Mass­a­chu­setts con­gressman Barney Frank.

Speaking to an audi­ence of exec­u­tive MBA stu­dents, alumni, trustees and North­eastern Pres­i­dent Joseph Aoun, Frank said that the United States is in the midst of an “eco­nomic phe­nom­enon” that began in the late 19th cen­tury with the rise of large indus­trial enter­prises. He called for lim­iting secu­ri­ti­za­tion of loans, appointing a risk reg­u­lator and restricting incen­tives for CEOs to gamble pre­car­i­ously with their company’s money.

A lot of the most risky eco­nomic and finan­cial activity in this country is unreg­u­lated right now,” Frank said. “We need to have rules so people can dif­fer­en­tiate what they should touch and what they shouldn’t touch, what’s a safe invest­ment and what isn’t a safe investment.”

Estab­lishing a series of reg­u­la­tions that limit indi­vid­uals from finan­cial over­com­mit­ments and restrict sub­prime lending, he said, will help assure the public of the government’s com­mit­ment to future eco­nomic sta­bility. Today, the public is investing too safely in U.S. Trea­sury bonds that accrue very little interest, Frank noted.

People are afraid to invest,” he said. “We have invest­ments that should be made that people don’t want to make.”

New reg­u­la­tions gov­erning com­pen­sa­tion of CEOs, too, might help cur­tail poor invest­ments. Often top exec­u­tives make poor choices with their company’s money, but incur no per­sonal finan­cial bur­dens, giving them great incen­tive to take risks, Frank said. “It’s heads they win, tails they break even.”

Ulti­mately, though, reviving the economy will require “rein­vig­o­rating the credit system” by helping finan­cial insti­tu­tions that con­tributed directly to the crisis. “We have to do things that are to the direct ben­efit of some of the very people that people are angry with,” Frank said, offering an analogy to when the Amer­ican gov­ern­ment “fired any­body that had any role under Saddam Hus­sein. That was any­body who knew how to do any­thing,” he said.

You cannot purge every­body in your old system unless you think you have a brand new system ready to go.”

Frank noted that there is prece­dent to his call for regulation.

In the late 19th cen­tury, antitrust laws and the Fed­eral Trade Com­mis­sion Act helped main­tain the integrity of indus­trial enter­prises. Later, in the face of the Great Depres­sion, the Secu­ri­ties and Exchange Com­mis­sion helped govern the stock market, he said.

Today, the rise of secu­ri­ti­za­tion, a process by which assets such as mort­gages are gath­ered together, repack­aged as secu­ri­ties and sold to investors, brings about new chal­lenges and oppor­tu­ni­ties sim­ilar to those of the past, Frank said.

Our job going forward…is to come up with new rules that allow us to con­tinue to get the ben­efit of this secu­ri­ti­za­tion, while cur­tailing abuses.”

Com­menting on the recent crit­i­cism of the reg­u­la­tory approach, Frank said the pos­si­bility of over­reg­u­lating the Amer­ican economy is not suf­fi­cient enough reason to dis­re­gard his recovery strategy. “The fact that you can over­reg­u­late is no more reason not to reg­u­late, than the fact that you can overeat is not a reason to starve your­self,” he said.