What went wrong with the world's markets?

Late in the year, Congress passed the Gramm-Leach-Bliley Act, dismantling the walls separating commercial banks, investment banks and insurance companies since the Great Depression. But the act did not provide for any SEC oversight of investment bank holding companies. The momentum was all toward deregulation.

There are some great details of the regulatory debate and inside-the-beltway jockeying in this piece. But there is also a smug assumption that what we really had was truly an "unsupervised" situation. As we continuously point out here, it is clear the financial system enjoyed a distinct "PUT" option -- that is, it was trained by Greenspan to expect whatever ad hoc bailouts were necessary to make up for major failures. Thus, while enforcement was not present, support (at the expense of taxpayers) was. Now, with the actions being taken to "bail out" the financial markets comprehensively, the "PUT" expectation has been validated beyond participants' wildest dreams.

There was more at play here than just a failure to police derivatives, particularly at the Fed. From long-running campaigns of minimizing reserves requirements, to failure to police subprime, the Fed seemed hell-bent on providing a veneer of safety while pulling out all the stops on financial expansion.