Prior to the stock market crash of 1929, banks let anybody “play” the stock market, from the guy who washed dishes at the local diner to the truck driver who transported chicken feed to the widow in Waukegan raising Rhode Island Reds in her backyard, everybody could play—often with just pennies. Back then, banks would take those pennies, nickels and dimes and combine them all into larger amounts and invest in the stock market. Margins—the amount cash the bank required to invest—were very small, typically less than 10%. If a stock moved in the wrong way a little, investors were asked to put up 10% of the total value of their holding in that stock. No big deal. Confidence was high, stocks were moving steadily upward, and everybody was making money.

One day, the market moved a lot in the wrong way. This caused a few banks to realize they did not have enough cash on hand to “cover” the margins, and of those that did, many then lacked enough cash to cover the day-to-day transactions of customers. These banks had no other choice than to close their doors. Customers panicked, ran to their banks, and tried to withdraw their money, more often than not to no avail. The effect of this bank collapse traveled fast.

This precipitated the Great Depression. Bank failures meant people lost their entire savings. Nearly fifty percent of mortgages went into default. Without capital to operate, businesses closed their doors. One day you were employed, the next you weren’t. “Brother can you spare a dime” became an all too common phrase. Politicians blamed the banks for allowing customers to play the stock market. Congress passed the Glass-Steagall Act of 1933.

Glass-Steagall forbade commercial banks from “playing” the stock market. People who wanted to play the stock market would have to go to a special kind of bank—an investment bank, a bank where smart, rich people could risk their money, a bank where account minimums and margin requirements were beyond the reach of the common man. Ordinary folk were encouraged to save their earnings in commercial banks with federally insured deposits, and “playing” the stock market was vilified as a high-risk activity. This was the law of the land until 1999.

What changed this? The Gramm-Leach-Bliley (GLB) Act of 1999. In the Senate, GLB passed 90-8-1, and in the House it passed 362-57-15. The overwhelming support for this bill made it veto proof. Even if President Clinton wanted to veto GLB, such a veto would have been merely symbolic. Both the House and the Senate had more than enough votes to override.

GLB once again enabled commercial banks to let “anyone” to “play” the markets, and that reason alone may explain why Clinton signed it. The key difference is that what “Markets” meant in 1929 and what it meant in 1999 were two entirely different terms. In 1929, there was but one market, the stock market. In 1999, Markets not only meant stocks, but micro-managing your 401Ks and IRAs. Individual investors began to branch out into all kinds of investment vehicles, including Commodities, Mutual Funds, REITs, SIVs, Mortgage-Backed Securities, Currencies, and a host of other instruments as well.

GLB also allowed commercial banks to seek their own asset protection. This was usually in the form of “insurance” or trading into “hedge funds” to mitigate the risk. All was good. Everyone was getting rich again. They were getting so rich in fact, that they needed to find creative ways of avoiding the high tax rates on dividend income. One of the ways people avoid high taxation is to buy a house and write off the interest charges from their mortgages. One of the ways banks avoid taxation is—that’s right, buying debt.

After 9-11, the Federal Reserve Bank (Fed) dropped interest rates to keep the economy moving. The Fed drove the rates so low that there was virtually no incentive to save. Banks began offering mortgages to anyone. You may recall how several banks were even offering home loans to illegal aliens with nary a blush. The chairman of the Senate Housing Committee, Barney Frank, demanded that the requirements for home loans be reduced even further—to extend the American dream to peoples of all economic backgrounds and nationalities. The banks knew there was an inherent risk in doing this and they balked. So Fannie Mae and Freddie Mac were created to guarantee risky Ninja (No Income, No Job, no Assets) loans.

Along comes an Internet bubble burst, the Iraq War, never-before-seen oil prices, and further unrest in the Middle East and suddenly many were unable to pay their mortgages, many of which had been offered as enticements to the common “person” as a way to improve life. Nothing down! Pay later!

This caused a liquidity problem. Banks failed. Equity funds shrank to nothing. Investment banks that had been buying all of that risk failed. Insurers of that risk failed. And now, Fannie Mae and Freddie Mac have failed.

That brings us up to today. Let’s review. The Republicans say the blame of Gramm-Leach-Bliley hangs around the neck of the Democrats because Bill Clinton signed GLB into law in 1999. The Democrats yoke the Republican by observing that Gramm and Leach were Republicans. This is all pabulum. As usual, the truth lies in between. The talking heads intimate that if Congress doesn’t act to “bail out” this bank collapse by Sunday night, the stock market may collapse. What troubles me is a suspicion that this bail out may serve only to delay the inevitable. No matter what happens this weekend, when the opening bell rings Monday, I will be watching.