The innovation of the financial markets was so rapid that regulators did not have the ability to keep up. I don’t see how free markets can function without defined rules and boundaries when new products are introduced. The financial services sector didn’t understand what was in the products they sold, making an argument against de-regulation – the hallucination of reduced risk: Aspirin or Amphetamines?  via Economist’s View .
Congress is trying to do something about it, but it’s a fine line between free and over regulated financial markets .
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee , said Thursday that the United States is in a recession and that Congress should consider a “financial services systemic risk regulator” to combat the causes of the credit crisis.
Speaking before the Greater Boston Chamber of Commerce, Frank blamed years of anti-regulation sentiment and the technical innovation of securitization, dating back to the 1980s, for the meltdown in the subprime mortgage market and the broader economic slowdown.
“Securitization has severely dissolved the discipline of the lender-borrower relationship,” Frank said, arguing that people have put too much faith in mathematical models. “Diversifying bad debt just spreads the poison.