We have allowed ourselves to believe the fiction that we once had a perfectly functioning free market that was corrupted by regulation and now must be freed again. In truth, our nation has been plagued by a long series of boom-to-bust economic disasters, with a brief reprieve in the second half of the 20th century following the economic reforms of the Great Depression. This suggests that economic chaos is the natural state of an unregulated free market and that certain key regulations are required for economic stability.
America's first boom-to-bust cycle resulted in the Panic of 1819. This was followed by the Panic of 1837, the Panic of 1857, the Long Depression of 1873 - 1896, the Panic of 1907 and finally the Great Depression of 1929 - 1939. At this point, the American people were tired of continuous economic chaos and empowered the government to take common sense steps to fix the problem. It was clear that in the modern world, hard work and prudent investing were no guarantee against dying in poverty, so we began creating the social safety net. It was also clear that a stable economy requires certain baseline regulations, principally the provisions of the Banking Act of 1933 that have become known as the Glass-Steagall Act.
Glass-Steagall drew a line separating commercial banks, where people keep their money, and investment banks, which gamble on high risk / high reward investments. It recognized that if banks could gamble with the nation's life savings, they could hold the nation hostage. If they gambled and lost, they could avoid responsibility by telling the nation: "If I go down, I'm taking you all with me". The government would then either have to bail them out, or suffer a national catastrophe. By separating commercial and investment banks, Glass-Steagall required the former to safeguard the life savings of the nation, while allowing the later to ride the free market as hard as they liked, as long as they were willing to pay the consequences. Think of it as the anti-bailout bill.
Given modern rhetoric, you would expect these regulations to have resulted in the end of the free market, the rise of socialism, the nation's collapse into an era of oppression and decline. Instead, what followed was the greatest period of wealth and stability in American history. This was the period in which America became the world's preeminent economic superpower, in which the American Dream became our reality, in which capitalism triumphed over communism to become the world's dominant economic system.
We had finally built a foundation that would give our economy the stability to grow. The economy would still go up and down, but without the devastating collapses that would set us back to square one. This golden period lasted until the end of the 20th century, when we allowed ourselves to be lulled into false sense of security, to forget the lessons of the past, and to begin chipping away at the foundation our economy was built upon. In 1999, the principal provisions of Glass-Steagall were repealed and by the beginning of the 21st century our economy's foundation had been entirely chipped away.
What happened next was exactly what you would expect: the floor dropped out from under us.
Our economy returned to its natural state of boom-to-bust chaos.
The problem is not that certain people are greedy, or unscrupulous, or engaged in class warfare, or are being unfair.
The problem is that, after a few shining decades of reality-based economics, we started making decisions based on how we would like the world to be, rather than the way the world really is. Today, the path to recovery is clear. We need to stop repeating the mistakes of the past and start repeating its successes.
