Market failure, government failure, and meltdowns

At Distributed Republic. Worth reading.

This suggests to me a considerable degree of confusion regarding how markets work, when they don't, and when we can expect government to do better. Hopefully I can shed a bit of light on these issues.

Market failure is a real phenomenon. But it's a phenomenon that's fairly well understood. Markets tend to fail in predictable, well-defined ways. Specifically, they tend to fail in situations where people have an incentive to act in ways that produce large negative externalities, or lack incentive to act in ways that produce large positive externalities.

....

This time, a bunch of really smart people acted in ways that were—in retrospect, at least—very clearly contrary to their own self-interest. And in the process they ended up screwing themselves over. If you're not confused by this, you're either better informed than I am (and I humbly request that you enlighten me with a comment), or you're not paying attention.

When a bunch of a really smart people fail to look out for their own self-interest, this isn't something that can obviously be fixed by more regulation. Politicians and bureaucrats aren't any smarter than the people on Wall Street. And they clearly don't have nearly as strong an incentive to prevent financial institutions from going broke as do the people whose money is actually on the line. [Emphasis added]

Note: "This isn't something that can obviously be fixed by more regulation". 

When people blame the melt-down on "deregulation" or lack of oversight, I'd like them to specify which regulations would have prevented it.  What precise actions should have been required, and from whom, that would have stopped the melt-down?  Or alternatively, what precise actions should have been prevented?

If a critic of "deregulation" can't specify a specific action, he can't make the case that lack of regulation is to blame.