I totally agree. Hayek’s quote was only meant to support the argument about the blind faith economists and key players in finance put on mathematical models, not to justify more regulation of the industry. But in any case, as Jerry Z. Muller suggests, I am of the opinion that something in the lines of the Glass Steagal act would be useful at this point. In conclusion, I think the useful discussion is about the quality and nature of regulation rather than about more or less regulation. But that’s a whole different subject by itself

Your quote of Hayek followed for demands of increase regulations and rules on sizes of financial institutions is however contradictory, the great liberal thinker would have not approved! Who is the bureaucrat who will determine the right size of firms? I rather have a high IQ banker in charge of my money that a low IQ government official telling the banker what exactly to do. (This assumes that your theory of lots of high IQ guys running the banks is right, I am not sure and I thought it was quite the opposite as met plenty of bankers who needed a mental cane to walk)

Certainly when firms are too big to fall they have to be regulated, as otherwise the externalities of saving them are more expensive for the society than the cost of regulating them (and I am not just talking of mathematical measurable costs, but more important to the annoying interference of a mandarin / bouncer on the affairs of a private citizen or group of citizens).

Perhaps a nicer solution will be for a group of right brain ladies and gents to form a bank, at the end if they are so much better they will prevail, and if not at least they will have a lot of fun trying, anyway the good capitalist governments won’t let them go down in case that they fail in their selfish rightist brain pursue!