It’s Friday, and Paul Krugman has returned to form, giving us another howler. Today, he tells us a tale of a wonderful regulated banking and finance system that never quite existed:

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.

However, that evil Ronald Reagan stepped in and ruined the wonderful system:

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.

However, history tells us a different story. First, the 1960s was a decade in which U.S. capitalization did not keep up with the rest of the world. Second, the government vastly increased spending and by 1971, the dollar was kaput (something left out in Krugman’s revised economic history).

By 1980, not only was inflation leading to real-live decapitalization from banks as people were fleeing those wonderful Regulation Q rates, but it also was painfully clear that the system that Krugman so praises was inadequate to fund the new technologies and the new direction of the economy. Whole fields of computers and telecommunications were financed outside that system because the system with its rules and regulations was not prepared to go in that direction.

Furthermore, much of the banking deregulation came during the administration of Jimmy Carter, not Reagan. (Carter was president in 1980, something that apparently has slipped the mind of Krugman the Distorian.)

So, once again, we have blatant dishonesty posing as economic commentary. F.A. Hayek was a Nobel winner just as Krugman is, but the difference between them, to quote the Great Irwin Schiff (Peter’s father) is like the difference between cheese and chalk.