I don't think that's the point he was making with that quote. What he was getting at was that extensive regulation and oversight did not stop the problem from occurring in that sector. Ergo, extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems.
If our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.
A position that regulation either failed or was absent from banking adds a third choice, which isn't far from Krugman's: 3) better government intervention and fewer problems.
The other major problem is that it wasn't regulation that failed, it was regulators. Many regulations that already existed weren't enforced. Looking at the rate of regulation increase it isn't hard to see why. How do you propose to solve this problem with more regulations? There's a real engineering problem here or even a computer science-style information theory problem with information flows totally exceeding the ability of the processing nodes to handle. Clearly, adding more processing work to be done isn't the answer to that problem, and we probably can't afford enough processors to make even our current set of regulations actually get enforced.
After a regulated industry undergoes regulatory capture you will see is a steady growth in the amount of regulation, and a simultaneous decrease in how much the regulation prevents that industry from doing what it wants. The regulations are added because they benefit the industry in some way, for instance by creating barriers to entry for potential competitors.
That is what happened in finance. Glass-Steagall really kept companies from doing what they wanted to do, and got dropped. But we got new "regulations" like the optional alternative way of calculating net capital ratios introduced in 2004 that allowed the 5 major broker dealers to double their leverage. The result? More lines of "regulation" that reduced how much actual regulating there was. Oh right, and a few years later a bunch of failed broker dealers. See http://www.nysun.com/business/ex-sec-official-blames-agency-... for verification of that.
Therefore a steadily increasing number of lines of regulation is not evidence that there wasn't major deregulation in the same time period.
Most so-called deregulation could be better termed re-regulation, it's just changing the rules to benefit different parties, not abolishing them.
(Having said that, btilly above uses deregulation in its new derogatory sense, much like the euphamism downsizing had to be replaced with rightsizing once everyone realised it still meant redundancies. Relatedly the depression was named that by people who thought it wouldn't be as bad as a proper recession, now depression means a really bad recession)
And in light of the inability of regulators to enforce the regulations and the plain failure of them to do so, who cares what the regulations actually said anyhow?
Additionally the Gramm-Leach-Bliley Act of 1999 that removed the last vestiges of Glass-Steagall (the parts that are related to this argument) happened under Clinton. The trend of financial market deregulation started in 1980, due to a shifting tide in economic though in the neoclassical (chicago school) vein and a multi million dollar banking lobby.
Economic systems need to be designed so that mediocre government regulation doesn't lead to catastrophes.
Eliot wrote: “After all, your pigs are far more intelligent than the other animals, and therefore the best qualified to run the farm – in fact there couldn’t have been an Animal Farm at all without them: so that what was needed (someone might argue) was not more communism but more public-spirited pigs.”
http://entertainment.timesonline.co.uk/tol/arts_and_entertai...
If this summation was accurate, I would tend to agree with your conclusion that little government intervention is preferable. However, I respectfully disagree with the premise, pointing to the success of Glass-Steagall (read 'government intervention') in maintaining a healthy separation of depository/commercial financial intermediaries and their investment bank counterparts. It was, clearly, the deregulation and removal of said safeguard that allowed for the conditions of 'too big to fail' and gave meaningful, even disastrous implications for the average citizen. Finally, the author is either misinformed or intentionally ignoring the causal relationship between deregulation embodied in the Gramm-Leach-Bliley Act and the financial meltdown.
By whom exactly? Mostly by those who tend to propagate further government influence on the markets. There are equally valid arguments which were made that government intervention in mortgage markets, fed policy etc. caused the crisis and the crisis could have been averted by having a truly free market.
I just want to point out that you seem to be influenced by biases as well. To point out other people's biases but not to acknowledge your own seems unfair.
That is why that whole 'lessons from the crash' thing is so difficult to grasp. Because everyone's analysis is ridden with pre-conceived notions and biases, it's hard to make out the actual truth.
A Chicago school economist decides that the cause of the crash was regulation, there's a surprise. It's difficult not to ad hom him here, but the article drips with scare quotes, special pleading, straw men and appeals to authority, so what's one more fallacy?
In fact, although I imagine he wants it to be taken seriously, it reads like little more than an angry forum comment dressed in academic robes. He's obviously heated and insulted by Krugman, and given that Chicago is broadly seen as discredited by the recent crash he is also concerned for his image, and is responding in kind.
The real economic lessons of the past few years are not to be found here, or anywhere. They will emerge in years to come. The difficulty is we only have the ability to really push through changes and learn from them now, so everyone's trying to be a part of that action. At least it's clear from both Krugman and Cochrane that the incentives enjoyed by bankers are very badly designed, and that's one issue we can address.