WARNING: Graphic Frog Content. Read at your own risk.
As the story goes, a frog is placed into boiling water. And when the frog hits the hot water, it immediately jumps out.
But when the frog is placed in cold water … heated slowly over time … the frog doesn’t move so quickly. As a matter of fact, the frog gets used to the heat until … too late … dead frog!
If the water is heated too fast, the frog jumps out. But if it’s heated very slowly … it won’t even attempt to escape.
I know this story can seem a bit unsettling. And just for the record, I’m totally for the frog.
Because, unfortunately … I am the frog. But so are you, and here’s why….
I just read Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. It’s a detailed report on the financial crisis compiled by the U.S. Senate Permanent Subcommittee on Investigations. And the more I read, the angrier I got.
You see, Congress and Wall Street have been turning up the heat on us for a long time. They’ve been slowly boiling us alive financially. And we never really felt the heat until now!
In this Senate report, you can see the build up to the financial crisis — one policy change after another. And every time the laws would change, the financial water got hotter and hotter.
The U.S. Senate Subcommittee stated it like this …
“Understanding the recent financial crisis requires examining how U.S. financial markets have changed in fundamental ways over the past 15 years. [And] two recurrent themes are the increasing amount of risk and conflicts of interest in U.S. financial markets.”
From the Great Depression until 1994, our country had financial policies that helped to manage unnecessary financial risk, while also keeping conflicts of interest at bay.
These laws included the “McFadden Act of 1927,” which prohibited national banks from owning branches in multiple states. The “Bank Holding Company Act of 1956” prohibited bank holding companies from doing the same. There was also the“Glass-Steagall Act of 1933.” Known as the Banking Act, this law prohibited commercial banks from engaging in the sale of securities.
Lastly, there was the “Commodity Exchange Act of 1936.” This provided for federal regulation of all commodities and futures trading — the buying and selling of standardized contracts the “future” delivery of a goods, assets or payment stream.
These laws were the backbone of the U.S. financial system. They provided much needed stability. Of course there were many critics of these “antiquated” regulations.
And the big argument was how these laws stifled growth and left the U.S. less competitive in a changing global marketplace. And all was fine until 1994. This was when the fundamental fabric of our financial system began to unravel. As far as Wall Street was concerned, the times were changing and they wouldn’t be denied.
The Financial Waters get HOT!
The first protective laws to fall were The McFadden Act and the Bank Holding Company Act. These were wiped out by the “Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.” This law repealed the prohibitions against interstate banking.
Until this time, U.S banking was made up of thousands and thousands of modest-sized banks that were intricately tied to their local communities. They were good for businessand good for the local community.
By keeping banks decentralized, the federal government could easily come into a failing bank and quickly close its doors. Depositors would be protected and any significant damage to the economy could be averted.
This “promoted competition, diffused credit in the marketplace, and prevented undue concentrations of financial power,” according to the report.
But all these protections were stripped away when Congress passed the Riegle-Neal Act. Now federally chartered banks could open branches nationwide. And with the fetters off, the big banks could gobble up smaller banks across state lines.
The era of “too-big-to-fail” had begun in earnest.
And to make matters worse — just 5 years later — Congress passed the “Gramm-Leach-Bliley Act of 1999.” Also known as the Financial Services Modernization Act, this law stripped away the provisions of Glass-Steagall.
Now commercial banks could take in depositor money AND transact in securities. Banks were now on a brokerage buying spree — more consolidations ensued and “too-big-to-fail” was bigger than ever.
The prior protections had now been wiped out and the proverbial heat was being turned up on the financial system. And like the frog — nobody was reacting to the change.
Then Congress really turned up the heat.
In 2000, the “Commodity Futures Modernization Act of 2000” was passed. And this law now paved the way for banks to play in a trillion-dollar unregulated market.
Worse yet, this law actually BANNED federal regulators from regulating the so-called “over-the-counter derivatives” market — the same market that ended up bringing down Lehman Brothers, AIG, Bear Stearns, and many other firms.
Heck, this last law alone nearly led to the COMPLETE collapse of our financial system. And candidly, with an estimated $1,200 trillion in global derivatives still outstanding, the jury is still out.
So here’s the deal, the water is already boiling. And its important to stay vigilant. Get educated on what Washington has on the agenda and let your Congressional leaders know where YOU stand.
You never know what one well timed and thoughtful objection may avail!
Disclaimer: No frogs were harmed in the preparation of this article.
[You can see my original frog post at the Campaign for a Sound Dollar. And while your there, take a moment to learn more about the campaign.]