Thus, he reasons, it is better to have tight regulation and avoid failure altogether:
In a crisis, the financial system will be bailed out. That’s just a fact of life. So what we have to do is regulate the system to reduce the chances of crisis and the taxpayer costs when the bailout occurs.(emphasis Krugman's)Here is the problem with his argument, as I see it. Regulation effectively creates a government-protected and enforced cartel. The financial system that ruled until the early 1980s was in danger of running aground because inflation was leading depositors to take their money from banks and put it elsewhere.
Furthermore, people can be glad there was an "elsewhere" in the financial system. Think where we would be economically had there not been investment bankers and others outside the banking cartel to help finance some of the most important high-tech ventures in our history.
Krugman's "solution" is to make everyone part of the cartel. And don't kid yourselves; what he is demanding is the formation of a financial cartel, and all of the evils that go with it. What Krugman refuses to admit is that the Federal Reserve System and government policies to push people into home ownership are what touched off this mess, and had the government not bailed out a number of the players, Wall Street would have had to pick up the pieces honestly, instead of what we see today.
Had bank regulations stayed the way that Krugman says they should have stayed, all of us would be much poorer today. It was not the fact that people were given more opportunities to engage in finance that touched off this meltdown. In the end, it was the Usual Suspects in Washington.