What if we took down Wall Street?

Wall Street has been occupied.

The global wave of youthful indignation -- which swept away despotic leaders in Libya, Egypt and Tunisia -- is now targeting the big, bad, bailed-out bankers here. The call to arms has spawned sympathy protests in most major U.S. cities, as well as overseas, with "Occupy Rome" turning violent.

This is just the latest manifestation of what is increasingly a universal outrage against economic injustices shared, with a few differences, by people from Athens and Madrid to Atlanta and Memphis. There is a strong anti-government bent, shared with the older Tea Party movement. There are many grievances: inflation, taxes, unemployment, corporate greed, lobbyists, stagnant wages and, above all, a growing gap between the ultrarich and the rest of us.

Above all, Occupy Wall Street takes aim at the big-money banks and hedge funders seen as responsible for the housing crisis, the ones who were rescued by taxpayers and the Federal Reserve's easy money, and are now profiting from the rebound and hoarding cash instead of making loans and rescuing homeowners.

But could we really take down Wall Street? And would we like the results? No, on both counts.

Finance evolved

One thing the occupiers on Wall Street seem to imagine is a return to a small, community-based lending model -- with mortgages and small-business loans owed to the bank down the street, if not to Jimmy Stewart himself.

But finance has evolved too far, is too globally competitive, plays too large a role in the overall economy and is too reliant on the "shadow banking system" of short-term market funding to be reined in now. There were no derivatives in "It's a Wonderful Life."

Likewise, it's hard to imagine any government agency reining in the activities of banks that work around the globe, 24 hours a day, in dozens of markets at once, at speeds so fast that banks move their servers as close as possible to exchanges to minimize the travel time of the electrons carrying their trade orders.

The good news is that the people in charge are doing what they can -- in ways, limited by the politics of international cooperation and harsh divisions in Washington -- to restrict Wall Street's power without harming a fragile economy. The best we can do is push those in charge to get the recovery back on track and creating jobs, to restore confidence in the financial system and to prevent another boom and bust powered by lax lending. These actions might also meet some of the demands of the occupiers.

Too big to fail means too hard to kill

Don't get me wrong: Wall Street deserves its share of the blame for the housing mess and its aftermath.

Although there isn't evidence of widespread criminality on Wall Street, there are plenty of examples of dubious, morally questionable and politically inept actions during the Great Recession.

Examples include the robo-signing foreclosure scandal; anecdotal evidence of increased insider trading; increasing reliance on hefty fees; the fight over huge executive pay and bonuses doled out by bailed-out institutions; the bets Goldman Sachs Group (GS, news) made against the housing market even while it was selling mortgage securities to customers; and the recent decision by Bank of America (BAC, news) to start charging a monthly fee for debit-card use.

Shame on them.

Why we both love and hate banks

Despite those sins, it's worth recognizing what the Wall Street banks represent in society, and what drives our love/hate relationship with them. Banks reflect the greed inside each and every one of us, tantalized with their promise of easy riches in good times. Yet we hate them when things turn bad.

Banks -- acting as intermediaries between savers and investors -- are the fulcrum of the business cycle. Major economic downturns, if they're not preceded or followed by war, disease or famine, are almost always caused by speculation, bad loans and financial panic. It was true of the Dutch tulip mania in the 1600s. It was true of the South Sea Bubble and Mississippi Scheme hatched in England and France in the 1700s. It was true of the U.S. obsessions with land, railroads and steel in the 1800s. And it was true of the various attempts to corner markets, run margin schemes and profit from market bubbles in the 1900s.

Even our founders rued the exploits of bankers and brokers, following the Panic of 1792 was quelled by a government bank bailout.

During expansions, banks funnel capital to areas with the best growth prospects. Success attracts more capital, breeding success. New savers pile in, looking for a piece of the action. Bankers relax their standards. And what was once healthy growth metastasizes into a speculative cancer that results in panic and recession.

When reining in the banks worked

Modern economic history has been a chronicle of attempts to calm and control this dynamic.

A laissez-faire approach typified America's 19th-century strategy. We had "hard money" backed -- save for a few years around the Civil War -- by precious metals. Thanks to President Andrew Jackson's distrust of financiers, there was no permanent central bank. These were turbulent times marred by frequent banking panics and recessions.

The strategy changed after the Great Depression revealed that without strong regulatory oversight, free markets have a tendency to self-destruct supernova-style. A flurry of new constraints -- most importantly, the Glass-Steagall Act of 1933 -- were put in place to protect investors and the economy from Wall Street's excesses. Glass-Steagall separated commercial banks, the lifeblood of industry and consumers, from investment banks, the riskier, market-focused entities.

It also helped keep banks from becoming "too-big-to-fail" behemoths that housed commercial banking, investment banking and insurance all under one roof -- as Citigroup (C, news) among others, did before the housing meltdown. Glass-Steagall forced a measure of discipline on the banks, because they couldn't take risks knowing that, if it all went bad, the government would have no choice but to save them.

Glass-Steagall was the foundation of decades of impressive economic growth, for the most part unmarred by major bank failures. We did get inflation and commodity price spikes, but few economic busts.

So naturally, Washington -- hot for the religion of deregulation, pushed by corporate lobbyists and under threat from foreign competition -- got rid of Glass-Steagall. The Gramm-Leach-Bliley Act, named for its Republican sponsors, passed with bipartisan support in 1999. We all know what's happened since.

Now what do we do?

Continued on the next page. Stocks mentioned: Wells Fargo (WFC, news)and Charles Schwab (SCHW, news)