Yes, I can see your reading of it now. But I think it would be disingenuous of him to make that claim, given the repeal of Glass-Steagall and the large reductions in regulation that allowed the problems in banking to be exacerbated (though this claim is itself questioned by other economists).

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.

Have you seen the charts of the amount of banking regulation per year, as measured in lines of regulation? I wish I could Google it up. The repeal of Glass-Steagall isn't even a blip in the graph, IIRC. It might be lines of above-average importance, but net-net the Bush administration continued piling on the regulations at pretty much the expected rate; I doubt a Democrat would or could have done much more.

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.

Lines of regulation is not a good measure. A lot of banking regulation is related to well, banking. Glass-Steagall is specifically related to investment banking which is a whole other ball game, and to call the repeal of that act insignificant because it isn't that "big" is patently absurd.

The repeal is not insignificant. My point was to counter the idea that banking had some sort of massive deregulation in the Bush era. One law repealed + massive growth in other regulations is hardly "deregulation".

Ever heard of regulatory capture? That's where a regulated group attempts to get control over the regulators, so they can then regulate their own industry for their own benefit. It is universal that regulated organizations will attempt this, and usually they succeed.

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.

Also, "deregulation" is a buzzword intended to frame the debate and make you believe that they are reducing regulation and therefore creating some kind of free market.

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)

How do you propose to solve regulatory capture with more regulations? Or more regulators? Given the obvious failure of regulation, why is the only answer that anyone can conceive of "more regulations"? Like trying to quench a fire by adding more fuel, oxygen, and heat.

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?

I don't have a way to solve it long term. However I believe that it can be worthwhile to have a regulation that temporarily makes things better even if it eventually fails. For example I think that Glass-Steagall was a good thing for a very long time.

Certainly, not all regulation is created equal. Historically speaking, Glass-Steagall was one (actually two technically speaking) of the most effective bills passed in the past hundred years. It was written in the wake of the stock market crash by people who were determined to make sure that such a calamity did not reoccur, attacking a systematic problem with the financial market at its root cause. I contest that the other regulations you refer to tend to be far less significant and effective, likely (though I may have my work cut out for me substantiating this) because the legislation treats symptoms rather than basic issues.

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.

It's easy to wave your arms and ask for "better" government intervention, but the government's already doing the best it can. It has ups and downs in each department as attention shifts, but on average it probably won't get any better over the long run.

Economic systems need to be designed so that mediocre government regulation doesn't lead to catastrophes.

Your option three reminds me of T.S. Eliot's review of George Orwell's classic Animal Farm.

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 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.

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.

There's a book out now called "This Time is Different: Eight Centuries of Financial Folly". Throughout history, in various types of governments and economies w/ varying degrees of regulation, there have always been financial disasters. There will always be financial disasters. So the issue is not more or less regulation. The issue is how to quickly recover from the next inevitable disaster. The best thing the government can do is quickly pay down the debt so that, in 10-15 yrs, it can borrow like mad during the next depression.

"extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems" - I see this recurring theme over and over again. Government vs free markets. The belief that some supernatural entity (the invisible hand on the free market) will make us all happy in the end is refuted by all human experience in the last millennia. As Karl Popper once said "Truth is not manifest". Humans will have to hack their environment continually in the face of hardship and arbitrarity - and in a democracy, the elected government is given the responsibility to execute that mission. Nature has not evolved to make humans happy, it's our task to make our world (economy) better - one hack at a time ...