The fundamental cause of the sub-prime mess, according to Paul Krugman, is:
The real sin, both of the Fed and of the Bush administration, was the failure to exercise adult supervision over markets running wild.
But let’s hope that when the dust settles a bit, Mr. Bernanke takes the lead in talking about what needs to be done to fix a financial system gone very, very wrong.
So the bottomline of Krugmanian approach to preventing economic crisis is:
Crisis ---> implies more regulation is need--->more regulation is implemented ----> if crisis still recurs ---> that means more and more regulations will be needed---> these additional regulations are implemented as well ---until the market is finally choked because of too many regulations, and there won't be any crisis. This then proves government regulation is effective in preventing crisis.