I’m a huge Paul Krugman fan, and today’s column (The Market Mystique) may be one of his most important.

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…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.

Obama’s team is composed of the wrong people focused on the wrong task. Rather than protect “the economy” they’re trying to protect the financial services industry because that’s where they came from and what they know. It’s a case of the Innovator’s Dilemma: they’re trying to change a system from the inside. It won’t work.

If you don’t believe it’s the same old people, just read Congress Passes Wide-Ranging Bill Easing Bank Laws from the NY TImes nearly ten years ago. [Thanks, Warren.] It’s spooky.

“Today [November 1999] Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

Lawrence H. Summers is now Director of Obama’s Economic Council.

As surprisingly few experts have said — indeed, Obama himself has hinted at — we need to shrink the financial services industry. As a society we need to devalue the institutionalized gambling (highly leveraged risk taking) and we need to make it less attractive to make money by playing with money as opposed to creating real value. That’s not easy to do, of course, but one way is as a byproduct of regulation. It’s a governor; a throttle. If we make it harder for people to make money by placing big bets with our money, fewer people will do so. Krugman says:

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As another example of where our government is focused, consider interest rates. An illiquid bank can borrow money from the Fed at less than 1%. But that bank is allowed to charge you and me, who are likely better credit risks than the bank itself, more than 20%. U.S. credit-card debt now exceeds $1 trillion. If the Congress really wants to fix the economy by helping people repay their mortgages and student loans, why don’t they address these usury practices? Could it be because they’re trying to protect our financial institutions rather than the people? Surprisingly, I find myself agreeing with many conservatives who are against all these bailouts. Maybe we should just let the whole thing collapse and make a fresh start of it all. It might be the better decision in the long run. And it might happen anyway, exacerbated by the loss of $2+ trillion in bailouts and stimulus.