In hindsight, one can wonder if there would have been a stock market bubble without the move toward economic deregulation that began 25 years ago.

The idea was that markets, freed from the shackles of government mandates and restrictions, would produce more competition, innovation and economic growth--so much more that it was worth the added risks to consumers and investors.

In time, the benefits of deregulation could be calculated in the falling prices of long-distance phone calls, mortgages and airfares, the increased returns earned by savers and investors, and the surge of investment capital to the entrepreneurial side of the economy. And although some risks were laid bare in the collapse of the junk-bond market of the 1980s, and the financial crisis surrounding the demise of Long-Term Capital Management LP in 1998, they were insufficient to shake the political consensus that had formed around deregulation.

Certainly no single act of deregulation contributed more to the bubble than the Telecommunications Act of 1996, which aimed to created competitive markets for voice, data, and broadband services. The act unleashed a flood of investment in wireless licenses, fiber-optic cable, satellites, computer switches and Internet sites, and accounted for much of the new capital that poured into the economy.

But even as the extent of the over-investment became clear and the telecommunications industry began its financial meltdown, the Federal Communications Commission maintained its faith in deregulation, arguing that it would be folly for government to step in and try to rescue the industry and attempt to manage the transition.

A similar outlook held sway at the Federal Reserve Board, which as far back as September 1996 began to debate whether it should try to prick the developing stock market bubble. In the end, nothing was done beyond Fed Chairman Alan Greenspan's gentle warning about "irrational exuberance," a view the chairman seemed to subsequently disavow as he embraced the idea that a revolution in productivity was indeed creating a New Economy.

The primary responsibility for policing the markets and corporate behavior rests with the Securities and Exchange Commission, whose chairman, Arthur Levitt Jr., warned early and often during the boom about the accounting games being played by public corporations, with the connivance of auditors, directors and Wall Street analysts. But Levitt's efforts to reform the accounting rules and beef up enforcement were thwarted by both Republican and Democrats in Congress. They repeatedly turned aside his requests for enough funding to allow enforcement to keep pace with the increase in volume and complexity of the securities being offered.

Although Levitt identified the worst areas of corporate abuse, he was unable to unwilling to use the resouces he had to make a high-profile example of companies that had engaged in major-league obfuscation and earnings manipulation. Under the banner of self-regulation, the SEC had long ago subcontracted some of its oversight and rule-setting responsibilities to industry organizations or boards largely controlled by them. These include the New York Stock Exchange, Nasdaq Stock Market and the Financial Accounting Standards Board.

The theory behind self-regulation was the nobody had more incentive to assure the integrity of public equity markets thatn the professionals whose livelihoods and status depended on it. But what the theory overlooked was that the self-regulatory bodies, operating in the name of market competition, had no competition themselves. When push came to shove, they realized their franchise was safe and investors had no alternative organizations to turn to.

-- Steven Pearlstein

Behind the Bubble: Regulators

The Cops on the Beat During the Bubble Years

Arthur Levitt Jr.

Former SEC chairman (July 1993-Feb. 2001)

He mounted the bully pulpit many times to exhort Wall Street and accounting firms to take more care to protect investors' interests, but he had little success in getting Congress on his side or in mounting tough, high-profile enforcement actions at his own agency.

Richard A Grasso

Chairman and CEO, New York Stock Exchange (June 1995-current)

Grasso spent billions on technology to make trading more efficient and easier to surveil for wrongdoing. He only raised the banner of more rigorous controls at public companies after investors confidence waned in the wake of accounting scandals.

Mary L Schapiro

President, NASD Regulation (Feb. 1996-Current)

Her team only began to tighten regulation of IPOs after the bubble burst. Now prosecutors are trying to prove that fraud was behind many of the moonshots in price that marked the bubble days of IPO trading.

The Local Prosecutors

Mary Jo White

Fromer U.S. Attorney, Southern District of New York (June 1993-Jan.2002)

She was the U.S. attorney with the closest eye on Wall Street malfeasance. She prosecuted corporate misbehavior and now, a lawyer in private practice, wonders whether the government is in a feeding frenzy of prosecutors.

Robert M. Morgenthau

Manhattan District Attorney (Jan. 1975-Current)

Morgenthau sunk his teeth into Tyco Corp. and its chief, L. Dennis Kozlowski, who he has charged with tax evasion and fraud. He is in the forefront of local prosecutors who are aggressively pursuing cases normally controlled by the feds.

Eliot Spitzer

New York State Attorney General (Jan. 199-Current)

Charging onto Wall Street last year with subpoenaed emails, Spitzer targeted the big investment banks and wrested a $100 million settlement from Merrill Lynch. He is pushing for more.

The Clean Up Crew

Larry D Thompson

Head, Justice Department's Corporate Fraud Task Force (July 2000-Currently)

The deputy attorney general was appointed earlier this year to lead what President Bush called a "financial crimes SWAT team." The task force coordinates cases, but has no direct authority to investigate or prosecute.

Harvey L. Pitt

Chairman, SEC (Aug. 2001-Nov. 2002)

Although Pitt resigned under pressure last week after a series of blunders, the SEC chairman is the lead figure in federal efforts to re-establish a sense of integrity, fairness and transparency in the conduct of U.S. corporations and its stock markets.

James Comey

U.S. Attorney, Southern District of New York (Jan. 2002-Current)

He has said that financial crime is the "crown jewel" of his office, given its proximity to Wall Street. He is already investigating several corporate blowups, including WorldCom, ImClone Systems and Adelphia Communications.