People who were around then might remember that Krugman's employer, the New York Times, praised the first major deregulation bill, the Depository Institutions Deregulation and Monetary Control Act of 1980. Yeah, you know how those NY Times editorial writers are a bunch of conservative, free-market Republicans.
This time, Krugman claims that as long as regulators are "smart" and "well-intentioned," then they can pull off the whole deal. I think it takes more than that. Krugman, unfortunately, demonstrates his ignorance of finance and of economics (not to mention economic history) in the following missive:
The pre-1980 system was, I’d argue, pretty robust. Bank regulators didn’t have to be all that smart, because the rules were simple — and besides, the large franchise value of banks, the fact that they faced limited competition and were almost guaranteed to be profitable, made bank executives unwilling to take big risks of killing the goose that laid golden eggs.However, the "golden eggs" of the 1980s were industries in which these bank executives refused to make investments. Ever hear of CNN? What about MCI? McCaw Cellular (now AT&T Cellular) might jog the memory a bit.
These and more all were industries that the banking system -- that "robust" system Krugman praises -- ignored. Krugman really wants us to believe that the high-technology industries, the very industries that are vital to our economic well-being, really just came into being, despite the fact that the banks (regulated by "smart and well-intentioned people") would not make loans to them. Indeed, every one of these firms came about because of the alternative system (specifically, Michael Milken and his "junk" bonds that turned out to be good investments) that Krugman wants to make illegal.
Now, I will be the first to say that if the government is going to backstop the financial system, providing bailouts and other goodies to prop up failure, then the system needs to be regulated. However, keep in mind that this kind of a system is not going to be effective in financing those sectors of the economy we need to lead us out of this recession.
However, none of that matters to Krugman. Here is a guy who really believes that all we need is for a government to have the "courage" to print money, borrow, and spend recklessly.