It turns out that there was a reason that the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and the Glass-Steagall Act were put in place in response to the Great Depression.

There should now be general recognition that a mechanism to govern the animal spirit of capitalism at highly levered financial institutions is needed to prevent them from getting out of control and crashing the economy, as they have now done.

The 1990s and early 2000s saw the regulation of financial institutions shrink to the point where characterizing the change as deregulation is inaccurate. It was total unregulation.

The beginning of deregulation proper may be pegged at 1978, when the Fed initially phased out Regulation Q, which had capped the interest rates banks were allowed to pay on deposits.

For those who would assume deregulation of banking was totally a Republican- or Bush-inspired idea, it was not.

Fast forward to 1999, during the Clinton administration, when Glass-Steagall was abolished. Citicorp and Sandy Weill's Travelers, which included the investment brokerage Smith Barney, had actually used a Fed-created loophole to merge the year before the abolition, partially in anticipation of the legislation.

Observers who raised questions about the prudence of mixing the aggressive, transaction-oriented investment bankers and commercial banks, with their depository responsibilities, were regarded as antediluvian and unintelligent for not grasping the appeal of the universal bank model.

Throughout the 1990s deregulatory policies also manifested themselves in the small-bank market, through start-ups that were chartered on easier terms than those available in previous periods. The start-ups were seen as pro-competitive, especially for small businesses.

The line of demarcation between deregulation and unregulation, in my opinion, came when Alan Greenspan told Congress in 1996 that the stock market might be showing irrational exuberance. What came after that was nothing — not only was there no attempt at regulation or action, but there was no further comment or jawboning about the rising Internet bubble.

Later, in elegant circumlocutions, Mr. Greenspan articulated his view that bubbles happen, nothing can be done to burst or mitigate them, and no one should attempt to do so. I will never be able to appreciate the basis for this viewpoint, because common sense tells us that the animal spirit of capitalism can periodically turn into a mob mentality that needs some braking before everyone goes over a cliff.

Another major event in the general abdication of regulation (or, even worse, the channeling of it into counterproductive action) was in 1998, when the SEC disciplined SunTrust for having loan-loss reserves it deemed too high. My opinion is that the SEC was following purist accountants' advice without properly consulting with bank regulators and bankers.

After that example, public banking companies and their boards were loath to have reserves deemed conservative. Would that excessive reserves were a problem now!

In 2004 the SEC was persuaded to let large investment banking firms raise their leverage from about 12 times capital to 30 or more. This decision is proving to have been disastrous, but it was very much in the vein of the final morphing of deregulation into the unregulation.

On the subject of the SEC's hands-off posture, one move that might have helped private investors' discipline of financial institutions was not done: updating the comprehensive financial disclosures to align them with the changing businesses of universal banks. Areas where more rigorous disclosure was and is still needed include illiquid asset valuations, mortgage securities, structured investment vehicles, derivatives, loan categories, and nonperforming assets.

Early this decade the modern financial world was dealing with an explosion of derivatives. I am convinced that regulators ignored this development because they did not understand the market and did not want to admit it.

The total notional value of derivatives is now thought to be above $600 trillion, and the notional value of the credit-default portion is thought to be about $60 trillion, though nobody is quite sure about those figures. It is glaringly obvious that leaving $600 trillion of any species of instrument completely unregulated and unsupervised is tantamount to a crime of omission.

During the housing bubble, regulators stood by while mortgage market participants ran wild. Contrary to revisionist, self-exculpatory assertions, many economists and observers knew that a dangerous housing bubble was emerging. Of course, the slicing and dicing of mortgages, combined with rating agency corruption, disguised the picture for the credulous.

Structurally, a portion of the mortgage market was outside the immediate purview of regulators, but this would not have prevented a regulator or Treasury Department official from making some leadership efforts in this area. Mr. Greenspan, Christopher Cox, or John Snow could have said, "I'm not sure about the housing and mortgage markets, but I think maybe everyone should slow down, and homebuyers should make sure they're being prudent."

It would not have been anti-free-enterprise to encourage a bit of common sense.

I am convinced that the elimination of Glass-Steagall and the integration of the aggressive investment banking mentality into universal banks was a major factor in their willingness to take on too much risk in mortgage securities and other mortgage-related activities. A transaction-oriented approach permeated the self-styled universal banks and produced a different type of asset book than commercial bankers' stewardship and relationship approach had produced historically.

As I see it, it was not the structure of the regulatory apparatus so much as the leadership failure by the people running the agencies and overseeing them at higher political levels that is at fault. Incompetence and inexperience in real-world banking, combined with naive ideological misconceptions, produced an anti-common-sense unregulation of the entire financial system.

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