A great deal of the regulation that frames financial markets, and especially that frame markets for complex products like derivatives and so on, are regulations that define property rights. For example, when I buy a AAA tranche of a portfolio of mortgage backed securities, what exactly have I just bought? Regulations here create markets by introducing new kinds of property. The impact of this regulatory framework was to help price assets by providing transparency (what did I buy?), contract law (what was just transacted?), and so on. Governments don't create markets for Frozen Waffles. But they sure created the market for residential mortgage backed securities, and collateralized debt obligations!

The problem wasn't strictly “heavily regulated nature of our financial markets”. The problem was the state of regulations covering the organizations participating in those markets. A healthy, innovative financial market is vital to late capitalism. It is the mechanism whereby savings are recycled into investment, where financial risk is managed. What went wrong was the way the political process designed the regulations on the firms involved in the markets, and thereby diminished my property rights (I owned shares in these suckers).

Wheat, the main ingredient in waffles, is subsidized and regulated by the government. The manufacture of waffles is heavily regulated as is their transportation to market.

There are plenty of rules and regulations concerning the storage and handling of the waffles once they reach the store, and as I said before, god help you if you're selling tainted waffles.

I submit that there is no such thing as “mundane market capitalism” anymore.

The market for waffles is as complicated, if not more complicated, as the market for financial products.

What country do you know of that has a free banking system? Does this country have the same kind of financial booms and busts that we have? The only historical periods I know of that had free banking (Scotland and Sweden) had less severe cyclical problems in their financial systems than modern central banking economies have.

Frozen waffles are not a fiat government created monopoly that are traded by semi-private companies. This differences are pretty apparent.

You can also buy bonds and insurance in those countries. They work pretty much the same way they work here.

I don't see your point.

And if you don't think frozen waffles made from government-subsidized wheat is “free from regulations,” try selling a toxic batch of them to the public and see what happens.

A waffle market with no regulation would look very much the same. (Think about countries with little regulation of food. You can still get frozen waffles.) A depoliticized, deregulated financial market with look almost totally different.

And government regulation is the reason for the difference.