A brief history of how you've been duped by the unprincipled heads of Wall Street banks, the Fed, and the Treasury

Their offices are in the marble Beaux Arts-style Federal Reserve Board building in Washington, in the granite Greek-Revival Treasury building in Washington, in the imposing and fortress-like Romanesque-Revival Federal Reserve building in New York City, and in the soaring glass towers of major banks.

From these impressive buildings, the masters of the financial universe have had a front-row seat on the savings and loan crisis of the 1980s; the Black Monday stock market plummet of October 19, 1987; the Asian, Russian, and Mexican credit crises of the 1990s; the banking industry being brought to the precipice by the collapse of Long-Term Capital Management investment company in 1998; the bursting of the dot-com bubble in early 2000; the bursting of the recent housing bubble; and today's severe recession and bear market.

For decades, the masters have fully understood the inherent dangers of the government creating moral hazards and easy money, of banks and investment companies being overleveraged, of obscene bonuses for traders based on short-term results, of off-balance sheet investments, and of such exotic financial instruments as derivatives, swaps, and collateralized mortgage obligations. Graduating from Ivy League schools and being exceptionally bright, the masters also understood how the Federal Reserve's tinkering with interest rates after the closing of the gold window in 1971 helped to transform the staid and stable bond industry into a casino run by arbitrageurs. And most important, they understood that overheated stocks and homes were risky investments for the average American.

They even read best-selling books that confirmed the dangers, including Liar's Poker (1989), Irrational Exuberance (2000), and When Genius Failed (2000). Yet they did not warn the public in unambiguous terms of the dangers, choosing instead to stay silent or speak in undecipherable euphemisms, thereby protecting their positions and power.

That makes them unprincipled people.

Who are they? They are the past and present heads of major banks, the Federal Reserve, and the U.S. Treasury. Let's identify some of them.

There have been 10 secretaries of the U.S. Treasury Department from the start of the Reagan administration to today. Four of them had been Wall Street big shots before taking office: Donald T. Regan had been CEO of Merrill Lynch, Nicholas F. Brady had been chairman of Dillon, Read & Co., and Robert E. Rubin and Henry M. Paulson Jr. had run Goldman Sachs.

The other six had held a variety of positions before becoming secretary: James A. Baker III had been a lawyer and political insider, Lloyd M. Bentsen had been the chairman of the Senate Finance Committee, Lawrence H. Summers had been a Harvard professor, Paul H. O'Neill had been CEO of Alcoa, John W. Snow had been CEO of CSX, and the current secretary, Timothy F. Geithner, had worked at the Treasury for Rubin and Summers and then at the Federal Reserve, where he became president of the Federal Reserve Bank of New York.

During the same period, there have been three chairman of the Federal Reserve: Paul Volcker (1979 - 1987), Alan Greenspan (1987 - 2006), and the incumbent, Ben Bernanke, who took office in 2006.

Some of the foregoing 13 men received media praise for rescuing the financial industry when the system had one of its periodic crises. They should have been castigated for not reducing the dangers beforehand and not warning the public of the dangers in language similar to the warnings on cigarette packs: Warning: Investing can be hazardous to your financial well-being if you gamble too much of your savings in risky investments. Remember, the game is rigged against you and in favor of Wall Street insiders.

Instead of sounding such a warning, the Federal Reserve, Treasury, and other government agencies gave a false sense of security to the American public about investing, thereby encouraging people who didn't understand the risks to take risks they couldn't afford.

Congress added to the false sense of security by passing a cornucopia of banking and security laws over the last 100 years: the Federal Reserve Act of 1913; the Federal Home Loan Bank Act of 1932; the Banking Act of 1933; the Securities Act of 1933; the Securities Exchange Act of 1934; the Commodity Exchange Act of 1936; the Investment Company Act of 1940; the Bank Holding Act of 1956; the Savings and Loan Holding Company Act of 1967; the Commodity Futures Trading Commission Act of 1974; the Depository Institutions Deregulation and Monetary Control Act of 1980; Garn-St. Germain Depository Institutions Act of 1982; the Financial Institutions Reform, Recover, and Enforcement Act of 1989; the Futures Trading Practices Act of 1992; the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994; the Gramm-Leach-Bliley Act of 1999; the Commodity Futures Modernization Act of 2000; the Sarbanes-Oxley Act of 2002; and the Credit Rating Agency Reform Act of 2006.

Some of these laws triggered crises because members of Congress didn't consider the moral hazards and unintended consequences of their legislation. The savings and loan crisis of the 1980s is a case in point.

Factors contributing to the S&L crisis were the Depository Institutions Deregulation and Monetary Control Act of 1980; the Garn-St. Germain Depository Institutions Act of 1982; and the Tax Reform Act of 1986, which eliminated many tax shelters for real estate investments and caused the real estate boom to end. Another factor was Congress giving S&L's the okay to sell their mortgage loans to Wall Street firms, which in turn bundled the loans -- loans that had the implicit financial backing of the federal government through the guarantees of Ginnie Mae, Freddie Mac, and Fannie Mae (sound familiar?).

Perhaps the most sordid story is the 1998 downfall of Long-Term Capital Management, which was a harbinger of things to come 10 years later with today's economic crisis.

Started in 1994, the hedge fund quickly amassed a capital base of nearly $5 billion and a derivative book of $1.25 trillion. Highly leveraged, the fund earned a 57 percent profit, or $2.1 billion, in 1996. Major banks and investment companies around the world loaned it capital without even conducting a cursory due diligence. They didn't examine LTCM's books, didn't ask for a list of its counterparties, and had no idea of the size of its outstanding derivatives or the extent of its leverage. Some of the lenders are the same lenders that have failed or have nearly failed today by not learning from their LTCM experience, including Merrill Lynch, UBS, and Lehman Brothers.

LTCM was staffed with the best minds in the country, including two Nobel laureates and several Harvard finance professors and MIT mathematicians and physicists -- all of whom developed and ran the computer models that were supposedly fail-safe but failed to account for the fact that markets aren't always rational because they are influenced by emotions, herd instincts, and black-swan events.

In 1994, as an example of the incestuous relationships between Wall Street and the Federal Reserve, LTCM hired David W. Mullins, vice chairman of the Federal Reserve and second in command to Alan Greenspan. Four years later, right before LTCM's fall, Greenspan would testify before the House Banking Committee that hedge funds didn't need to be regulated because they "are strongly regulated by those who lend them money."

In spite of their intelligence, Greenspan and other believers in free markets failed to understand that trading in money is not like the buying and selling of goods and services. That's because the government has a monopoly over money and, through its central bank, can arbitrarily change the quantity of money and its value, especially with the demise of the gold standard. As long as fiat money is not just a medium of exchange but is also a commodity to be traded by speculators, the dealers in money need to be regulated. But even then, this is not a game that should be played by the average investor, for, as we have seen, the regulators are as unprincipled as those they regulate.