The idea that markets self-regulate, or come close to self-regulation, is a surprisingly robust proposition. Practical experience and simple reflection would seem to run contrary to this notion, but for a period of time from the 1980s forward, the idea that markets worked best if left to their own regulatory efforts seemed to gain support, particularly in the financial services industry. The key to making it sound reasonable is to not carry it too far and to support it with the right kind of story. It also helps if the story is buttressed with a large dose of cynicism regarding the ability of governments to get things right.

The story goes like this: Financial markets are places where firms and individuals can gain or lose enormous sums of money; reasonable people will not venture into those markets without doing all the necessary background checks and research; and financial firms that do business with one another will not establish relationships if their potential partner’s corruption or incompetence will hurt their own reputation and profitability.