I don't think it's true that the financial system would be more stable absent all (or almost all) regulation, as Boettke and Horwitz argue. But to acknowledge that is not to imply that the system we have had at all resembles a deregulated system, nor that failures can't occur despite a heavy regulatory structure. The recent financial crisis spread throughout all kinds of countries: some heavily-regulated states had crises, while others didn't. We need to acknowledge that it's not as simple as "regulation safe, deregulation risky".
Here's what I did not say:
We should deregulate everything. That would make the system more stable.
In previous posts I've argued that the pre-crash U.S. banking/financial system cannot reasonably be considered as "deregulated" as it was one of the most regulated industries in the country, and was more-heavily regulated in the U.S. than in almost any other industrialized country. For example:
Reagan actually strengthened the financial regulatory structure after the Latin American debt crisis (Basel I), as did Dubya after the Enron collapse (Sarbanes-Oxley). The only major deregulation of the past three decades occurred during Clinton's second term (repeal of Glass-Steagall), and mostly what it did was allow American banks to trade on their own behalf... just as European banks had always been allowed to do.
The pushback comes along two general lines:
1. ::Fingers in ears:: NONONONONONONO! Reagan/Bush = free market fundamentalism. Therefore, they just must have deregulated everything, and this just must have caused the crisis. I will not believe anything to the contrary, ever, because I don't want to. (Extreme version at Seeking Alpha: accusing me of graduating from the "Joseph Goebbels School of Propoganda [sic]". No, seriously.)
That is not the more nuanced critique. This is:
2. There was "de facto deregulation" or a "deregulatory spirit" among regulators prior to the crash, despite the de jure tightening of regulations in some areas. This was pushed by one or two of the Seeking Alpha commenters, but mostly by Larry in comments here. The basic idea is that over the past few decades traditional banking functions (like mortgage lending) have increasingly been performed by non-depository institutions that were subject to much less oversight. At the same, banks and other financial institutions began using less-regulated or non-regulated financial instruments like derivatives, and nobody in government acted to bring these into the regulatory orbit.
There is a lot of truth to this, and it is perfectly compatible with the view I presented. I wrote that the regulatory code got stricter from 1980-2005. #2 argues that this may be, but it's only part of the story. If financial activity shifted to less-regulated institutions, then we could simultaneously say that the activities of financial institutions may have been less-regulated overall, even while the regulatory code was tightened. None of this implies, however, that it is the result of deregulation. In fact, the opposite is likely true if the "shadow banking system" grew in response to new regulations.
Did this happen? I honestly don't know. The financial industry in 1985 looked quite a lot different than it does today. True, there were no Countrywides issuing mortgages to everyone in the country, but there were a bunch of Savings and Loans doing similar things. Securitization wasn't as common in the 1980s, but securitization was done most by the GSEs operating under a public mandate and with a government guarantee, so it's a bit difficult to blame "deregulation" for that[fn1]. True, derivatives weren't as common in the 1980s and they were never required to be traded on exchanges, but does anyone really believe that that would have prevented a financial crisis when home prices fell by 40% nationwide? Remember that securitization was created to increase the liquidity in the system, just as credit default swaps were created to hedge against default risk. (It doesn't work too well as a hedging device if the counterparty can't pay up, but it's hard to base your investment strategy on the assumption that AIG is going to go bankrupt.)
Meanwhile, the bedrock of all regulatory regimes -- capital requirements and accounting standards -- were both stricter in 2007 than they were in 1980, for banks at least. If you don't trust simple counts of new regulations as evidence of this, or the enactment of the first two Basels and Sarbanes-Oxley, then you can still infer it from history. The fact that financial activity shifted away from the more-regulated banks to the less-regulated "shadow banking system" is itself evidence that the regulatory code had gotten stricter overall. Why? If regulatory arbitrage has become more profitable because the regulatory burden is heavier, then we should expect to see more of it. Which we did. Why else would a "shadow banking system" exist except to escape regulations?
The upshot is that the financial industry changed quite a lot in the past 30 years, and so did the regulatory structure. There were some deregulations, but many more new regulations (four times as many, according to Horwitz and Boettke). There were two major international regulatory agreements during that period, both of which tightened regulatory regimes. Some financial activities remained less-regulated than others, but that had always been the case. Non-regulation is not the same thing as deregulation. Blaming Summers, or Rubin, or Bush, or Reagan for not doing what nobody else had ever done is nothing more than scapegoating.
Whatever else we can conclude from this, we can say with certainty that the "30 years of deregulation by free market fundamentalists caused the financial crisis" narrative is at least too simplistic, if not outright false. We can say with certainty that financial markets, among the most-heavily regulated markets in the world, did not in any way approach laissez-faire. Anyone who is arguing either of those points (e.g. Charles Ferguson) is either ill-informed or mendacious.
[fn1] And, contrary to CW, W. Bush tried repeatedly to regulate the GSEs more tightly and was rebuffed by Congress. Many Republicans were part of that effort, but the biggest obstacles were noted laissez-faire fundamentalists Chris Dodd and Barney Frank. Larry Summers, for the record, wanted to regulate the GSEs more strictly in 1999, as did Alan Greenspan by at least 2004. It is true of course that both pushed hard against regulating derivatives. As with everything else, it's just not as simple as Summers/Greenspan = deregulation. It depends on the case.