by Thomas Frank

The great fear that hung over the business community in the 1970s was death by regulation, and the great goal of the conservative movement, as it rose to triumph in the 1980s, was to remove that threat--to keep OSHA, the EPA, and the FTC from choking off entrepreneurship with their infernal meddling in the marketplace.

Defunding those agencies was one way to stop the killer bureaucrats; another was to stuff them full of business-friendly personnel who would go easy on regulated. The signature conservative regulatory idea became "voluntary enforcement", because everyone now knew that efficient markets regulated themselves. Bad practices or tainted products drove away consumers; therefore firms had an incentive to behave, an incentive far more powerful than some top-down scheme in which big brother told them what to do.

Whether people ever truly believed this nonsense or not, its application over the years makes up the basic story of conservative governance as I tell it in my book, The Wrecking Crew. This is the philosophy by which conservatives gutted the EPA and the Labor Department, turned over the Interior Department and the FDA to the industries they were supposed to regulate, let the CEO of Enron advise the vice president on energy policy, and generally came to regard business, not the public, as government's "customer" (a word that crops up with disturbing frequency in conservative regulatory history).

But it is only now, as we watch the financial system crumble around us, that we can really see the devastating consequences of this folly. It turns out the Securities and Exchange Commission (SEC), which was responsible for regulating investment banks, did a significant part of its job through a voluntary program which firms could participate in or not as they saw fit. As the New York Times told the story on Saturday, this system had--of course--been pushed for by the investment banks themselves, who wanted it in order to avoid the stricter rules from European governments that they would otherwise have had to obey.

And now, as a consequence, the SEC has almost no industry left to regulate. Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, Morgan Stanley: All of them are gone or restructured. At business's urging, business was left up to its own devices; its own devices turned out to be precisely the things that our grandparents set up regulatory agencies to guard against: euphoria that leads to panic; perverse incentives that lead to fraud; boom that leads to bust.

As you watch the world crumble, try taking your Armageddon with this sprinkling of irony: Over the last three decades, business has got virtually everything it wanted, and its doomsday scenario from the 1970s has come true because of it. The regulators have indeed killed the regulated--not by intrusive meddling but by doing nothing, by taking a nap while the financial sector puffed up the bubble and blew itself to pieces.