As top officials at the Treasury, the Federal Reserve, and the nation's largest banks struggled last weekend to save the doomed Lehman Brothers and worried over a half-dozen other larger institutions that are so interconnected that world markets could be shocked and easily destabilized by their collapse, I was reminded of a passage from William Manchester's book on the Middle Ages, "A World Lit Only by Fire": "Even the wisest of them were at a hopeless disadvantage, for their only guide in sorting it all out — the only guide anyone ever has — was the past, and the precedents are worse than useless when facing something entirely new."

Welcome to the Interconnected Age, where mammoth financial institutions are allowed to grow so large and become so interconnected that the very foundations of our nation's economy can be cracked by the failure of one of these financial beasts. Welcome to a world that was not created by Alan Greenspan's Federal Reserve, though the central bank certainly was its chief facilitator and cheerleader, with a healthy assist from Wall Street financial moguls and "free market" think tanks.

Yes, "big" has been all the rage. During the past 20 years there has been no such thing as "too big" for the Treasury, Fed, Justice Department, or Wall Street. The bigger a financial institution became, the louder Wall Street cheered. When Travelers bought Citi — a clever ploy used by Citi to skirt the law — the Fed approved the transaction. The move was hailed by Wall Street as a master stroke of innovation and cutting-edge financial genius — never mind that the transaction's legality was doubtful at the time. The Fed had allowed Citi to become so big and wield such enormous clout over the financial markets and system of the United States that it moved Congress to change the statute — which Congress obligingly did in 1999.

Buzz words like "efficient deployment of capital," "overcapacity in the financial system," and "fragmented markets" were actually code words for letting the big get bigger and take more and more market share, dramatically increasing systemic risk and reducing diversity and choice in our financial system. After all, the great Wall Street moguls and financial gurus proclaimed, the smaller institutions were not nearly as efficient at deploying capital for the betterment of our society.

Policymakers and leading Wall Street voices played the siren song of the benefits of consolidation and squeezing inefficiency and overcapacity out of the financial system. Financial innovations such as hedges, derivatives, swaps, SIVs, CDOs, and CDSs were developed with great fanfare and much praise from everyone, including Treasury secretaries of the present and past and the Greenspan Fed. Think tanks' "free market" pundits cheered each new exotic instrument. We now know that these exotic vehicles, designed to diversify and spread risk, only made risk less transparent and, therefore, more dangerous — especially when Wall Street institutions were excessively leveraged to begin with. As it turns out, these financial innovations weren't exotic, they were toxic.

Each megamerger was hailed as a great boon for the United States and its consumers and businesses. We lived in a new enlightened age where deep recessions and banking crises of the magnitude of the Great Depression were anachronistic, things of the past, because in our new modern age we had learned to spread risk and deploy capital efficiently. Institutions were now so large that they could absorb shocks unlike any before them — they actually enhanced the safety of our system, according to the Wall Street geniuses, because they were not "concentrated" in any one region or, in some cases, any one country. Our mega-institutions were thought to be Titanic-like, unsinkable — and we all know how that turned out.

Look what those policies have wrought! Millions of homeowners are desperately fighting to stay in their homes; hundreds of thousands have already lost their homes; consumers are facing difficult choices; a credit crunch is on the way; institutions are failing; and higher FDIC premiums are coming.

Why? Because for nearly 30 years, official government policy best articulated by the Treasury and the Fed has encouraged and supported the consolidation of the entire financial services spectrum, which has led to the dangerous "interconnectedness" of mammoth institutions worldwide. Our top financial policymakers stopped thinking like bankers and regulators and instead began to behave as if they themselves were financiers and great innovators of public finance. These mega-institutions were allowed to grow so large that federal regulatory authorities across the board could not adequately oversee, examine, or control them. Just like the robber barons of the Gilded Age, these institutions became bigger than government.

Tragically, of course, now we know we were all misled. Our government, our regulatory authorities and Wall Street, and the think tanks that support them, had no idea what would happen in a world of interconnected mammoth financial corporations — a world where even the senior managers of these megafirms could not keep track of their assets, liabilities, counterparty risk, or the fraud that inevitably sets in when managers are driven by incentives that reward risky behavior. Now we know that the words of confidence and praise that we all listened to were being spoken by modern-day pied pipers whose pronouncements were leading millions to their ruin.

ICBA hopes that members of Congress and top policymakers will begin to recognize that the overconsolidation of our nation's financial resources has been a terrible and costly mistake, and that further consolidation of the financial services industry or allowing the mixing of commercial and banking firms will have even more tragic consequences than we have already seen.

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