Michael Lewis and David Einhorn have written the best summary I've seen of why the recent financial meltdown happened, in an amazing editorial in the New York Times. Their very long, very well-done article (Part I and Part II) details both how regulation failed and how it is integral to smoothly functioning markets.
Einhorn is one of the real heroes of this meltdown. As a brilliant and wrongly-maligned hedge fund manager, he was one of the first and most articulate critics who chronicled the outright fraud, misconduct, willful ignorance, and inbred conspiracy perpetrated by financial companies (like Allied Capital and Lehman Brothers), bond insurers (AMBAC and MBIA), ratings agencies (S&P and Moody's), and government regulators (SEC, Treasury, and the Fed).
This meltdown (and the hundreds of billions we're throwing at it) are the results of an unfettered, unregulated, so-called "free" market. Einhorn and Lewis demonstrate why regulation is necessary to a healthy, functioning marketplace.