Reading the CULPA review of Sunil Gulati's Principles of Economics course in the winter of my freshman year, I came upon a review that read: "focuses too much on free-market economics.." I remember thinking that this was a strange sentiment because obviously we would only focus on free-market economics, its the only one that works! But I, like so many others, was wrong. Very wrong. Our belief in the undeniable and unerring markets has led us to the greatest financial crisis since the Great Depression of the 1920's and '30's. Even the leaders of our government were wrong, and President Barack Obama is finally acknowledging his guilt, the guilt of his predecessor, and the guilt of many of the most powerful men and women of America. But this piece is not about my newfound disdain for free-markets and the government officials and capitalists who are more concerned with random profit margins than their social responsibility. This is about the how the government's unwavering protection of the financial status quo hindered government officials (including legislators, advisors, and two Presidents) from performing their most sacred task: protecting their citizenry (in this case) from the avarice of the most powerful American and foreign financial institutions.

The causes of the recent credit crisis are founded in the financial crisis stemming from the burst of the tech bubble in 2000. Acting to avoid recession due to the tech bubble burst and the terrorist attacks of September 11, 2001, then Chairman of the Federal Reserve, Alan Greenspan, decided to cut interest rates on loans to 1%. The 1% interest rate was the lowest interest rate in the history of the Federal reserve and initiated a fury of borrowing. Mortgages, and the refinance of existing mortgages, became the predominant form of lending in the early part of the decade; and not only was the amount of lending taking place surprising, so too were the types of loans. Banks who loaned money through mortgage brokers then sold the mortgages to investors (banks, hedge funds, private equity firms, etc.) who would collect the monthly payments made on houses. The demand for mortgages was so high that banks began lending money to borrowers with bad credit histories or without even order bothering to check borrower's credit histories. The mortgages that were approved for such borrowers were called ‘sub-prime' mortgages (‘prime' mortgages are those approved for borrowers with good credit histories), which featured highly variable interest rates, often causing dramatically increasing monthly payments.

Unsurprisingly, many of these borrowers were unable to maintain their monthly payments, and were forced to default on their mortgages. Soon, investors no longer collecting monthly payments, but collecting foreclosed houses. Two hedge funds, owned by Bear Stearns and avid investors in the ‘sub-prime' mortgage market failed in June 2007, and were only the first of many hedge fund, private equity firms, and many other financial institutions which would be unable to attain enough credit to remain solvent, and eventually declare bankruptcy. This crisis is one of credit: there was excess and inexpensive credit in the market, which a created a bubble of demand for more cheap credit, increasing this bubble. To maintain this demand for credit, bankers created toxic lending practices which artificially inflated this bubble. However, the collapse of the ‘sub-prime' mortgages market caused the bubble to burst and left financial institutions with illiquid assets (houses that could not be sold and thus, turned into cash) and not enough money. Many of these institutions declared bankruptcy and thus, could not spend money, causing the economy to shrink rather than grow. But how did the government let us down?

The government passed the Troubled Asset Relief Program (TARP), which would buy the toxic assets from banks and other financial institutions for below-market prices, in the hopes that these institutions would begin lending money again, and more importantly, spending money again. The TARP fund gave financial institutions such as Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup, and the American International Group (AIG) approximately $243 billion with which to correct their balances sheets and maintain solvency; while only approximately $50 million dollars was used to aid homeowners which were adversely affected by this crisis. Treasury Secretary Timothy Geithner, and President Obama's economic advisor Lawrence Summers, insisted that banks needed an injection of hundreds of billions of dollars in order to survive, and that regulation of banks would only encumber capitalist processes and make TARP unattractive to the CEO's of major banks. Geithner and Summers were not able to foresee that these same financial institutions which were saved instead of homeowners, would been rewarding their employees tens of millions of dollars in bonuses, even after they required government (tax-payer) money simply to maintain their existence. Why was is that our government saw it fit to aid the banks which had created the crisis, and not those people who were harmed by it?

The most important dimension of this unfortunate financial crisis (the recovery from the actual crisis) has very conspicuous political implications, which our new President has quickly picked up on. Our government has forgotten that the most important unit of our society is that unit which is too often the least powerful and the least heard. The most important unit of our society is that of the citizen, especially, the most vulnerable citizens. We must never forget our foundations: our unalienable rights from which we garner pride and comfort, that which has made America the longest lasting democracy in the world. Conversely, we must never forget what I like to call the ‘Star Wars' metaphor: that a democracy falls from within before it will fall from without; and the moment at which the government ceases to protect the interests of it's citizenry is the moment at which a democracy begins to fail.

I am most infuriated by the recent trend of pundits, bankers, and government officials labeling the rage felt and expressed by middle-class American as "populist". Their attempts to render the legitimate anger of citizens banal are disgusting. Legally, the people of the United States must be protected from the predatory and negligent investment practices of financial institutions. Elizabeth Warren, Harvard University Law Professor and Chairwoman of the Congressional Troubled Asset Relief Program (TARP) Oversight Panel, insists that a consumer Protection Agency must be created in order to protect citizens from the disastrous effects of another financial crisis. Warren warns that the maintenance of the status quo--allowing banks to continue preying on the American middle class while earning record-breaking bonuses and leaving the middle-class to wallow in mountains of debt--will eventually kill of the American middle-class. Further, Paul Volcker, the Head of the Economic Recovery Advisory Board and Chairman of the Federal Reserve from 1979-87, is convinced that commercial banks should not handle treacherous investment assets such as securities and derivatives, which are just some of the modified mortgages that were sold to investment institutions. He also believes that commercial and investment banking should be completely separated because "The banks are there to serve the public...these other activities create conflicts of interest...they create risks".

The former Fed Chairman is joined by Senators John McCain and Maria Cantwell, as well as Nobel Laureate in Economics and Professor, Joseph E. Stiglitz, in calling for the re-enactment of a modified version of Banking Act of 1933 (which is sometimes called the ‘Glass-Steagall Bill after the two Senators that proposed the legislation); legislation which was originally a part of the new deal. The Glass-Steagall Act, which became law in 1945, was enacted after the failure of close to 5,000 banks during the Great Depression. The act prohibited commercial banks from handling securities as well as prohibiting investment banks from accepting deposits, effectively separating commercial and investment banking. It also allowed for closer regulation of banks by the Federal Reserve, and created the Federal Deposit Insurance Corporation, which insures bank deposits.

The most important aspect of this financial reform that the resurrection of a modified Glass-Steagall would bring about is the reduction the size of banks, thus reducing the cost of rescuing financial institutions during an economic recession. Legislation would also allow investment banks to trade, sell, and underwrite securities and derivatives; and because investment banking would be conducted independently of commercial banking, deposits would not be affected if risky banking practices go awry. Finally, the re-enactment of this legislation would allow the capitalist process to work unencumbered by constant government interference.

The moral of the credit crisis should be one of restraint and common sense. The government and financial institutions alike must realize that nothing (even economic bubbles) do not grow indefinitely. But more importantly, there should never be such a thing as a free lunch. Financial institutions have been able to create this crisis and be saved from it without being held accountable. In his other book, The Theory of Moral Sentiment, Adam Smith, the Father of modern economics, severely critiques "...the disposition to admire, and almost to worship, the rich and powerful." Because, first and foremost, Smith was a moral philosopher, he understood that one must first concern oneself with the protection of the society and those in it rather than than one's own rapacity.