We were told it was our fault. We were told we never should have used all that easy credit, bought those houses, taken out those second and third mortgages. True enough, but that’s only part of the story. The reality of what happened in the financial crisis is terrifying. And all the more so because it’s still happening today. Main Street gets poorer, but the big players at the corner of Wall and Broad just get richer. 

Unemployed workers during the Great Depression
(Daily Herald Archive/Getty Images)To understand the current crisis, you have to start with the last one. The Great Depression forced big reforms to America’s financial system. Congress passed laws to prevent some of the excesses that triggered that first meltdown. The 1920s—the roaring 20s—were similar to the 1990s. Times were good, unemployment was low and credit was easy. Brokerage firms tempted the public into the ever-rising stock market. They wanted to sell shares, and were happy to loan you the money to buy them. You could own ten dollars worth of stock for a dollar. But in the late 90s, the rules changed. You could buy 33 dollars worth of stock for a dollar. Apparently, no one had learned a thing from history.

But it doesn’t stop there. One of the hallmarks of the sober reckoning after the first Great Depression was something called the Glass-Steagall Act. It regulated banks to prevent the wild speculations of the 20s and 30s. But in 1993, Glass Steagall was repealed. Financial-industry lobbyists had done their job. The door was now wide open for even riskier gambles taken by banks and other financial institutions.

Other changes were happening too. For one thing, the power of computers now allowed Wall Street geniuses to create incredibly complex new products. They were all just paper, really. But in the go-go environment of the times, these gadget deals seemed like the beginnings of a brave new world of finance. One example is the credit default swap. This clever piece of paper allowed banks, hedge funds and others to take out insurance against a price drop of the mortgages they were packaging. In other words, they were betting against the very stuff they were peddling! And making money both ways.

Geniuses, right?

For a while, they were. Everything worked like a charm. Credit default swaps and other exotic vehicles made staggering amounts of money for the investment banks. Those banks then turned around and bought traditional Wall Street brokerage firms. We were told this streamlining of the financial industry was great for the economy, and great for us. The “masters of the universe” at the corner of Broad and Wall found themselves swimming—no, drowning—in money.

Average pay on The Street zoomed upward, and the stars—the big traders and execs—were vacuuming up tens of millions of dollars a year in salary. Toss in bonuses, stock options and other forms of compensation, and suddenly that little slice of lower Manhattan was sitting on an ocean of money. People were furnishing their offices with $60,000 oriental rugs, expensive restaurants were jammed and New York real estate was affordable only if you were a Wall Street insider. Or maybe an oil sheik. And all the while, the regulators and politicians snoozed. Or were paid off.