It was a startling admission from one of the architects of the modern financial system. John Reed, who with Sandy Weill created Citigroup, said the merger was a mistake. What's more, Reed went on to say that the repeal of the Glass-Steagall Act, which was needed to make the merger legal, was also a mistake. He said we should "compartmentalise the industry for the same reason you compartmentalise ships" and keep "consumer banking separate from trading bonds and equity". Reed's mea culpa came a decade late and left the world's financial system a few hundred billion dollars short.

Twenty years ago, the fall of the Berlin Wall shook the world. The fall of the wall that separated commercial and investment banking 10 years ago took rather longer to reverberate around the world. The Citigroup merger was so big that it literally required an act of Congress, but that didn't keep it from needing $45bn in taxpayer funds to survive. Today, Citigroup and the other financial monsters created in the wake of that fateful merger are struggling to recover from their self-inflicted wounds and repay billions in bailout dollars from the US government.

After nearly 30 years of financial innovation, it's time to reconsider the laissez-faire attitudes that have wreaked such havoc. The savings and loan crisis of the 1980s should have warned us of the dangers of freeing stodgy lenders to take on risks they didn't understand. Instead, the free-market acolytes argued that we needed even less regulation, not more. The collapse of Long-Term Capital Management in the 1990s should have warned us of the dangers of exotic financial instruments. Instead, the wizards spread their poison throughout the financial system, and banks became more and more like hedge funds.

Time and again, we have given the wizards of Wall Street all they want, and what do we get? Bigger and bigger messes. Time and again, we have been told that an increasingly unfettered financial system will unlock more capital and give us ever-growing prosperity. Instead, we are suffering through the greatest economic crisis since the 1929 crash that prompted the adoption of Glass-Steagall Act in the first place.

A year ago, Alan Greenspan, the high priest of laissez-faire capitalism, admitted that he was "absolutely, precisely" wrong in thinking that self-interest would protect the financial system from self-inflicted collapse. Yet, the belief that unfettered finance would bring blessings to shareholders and customers alike dies hard.

Instead of wondering which institutions might be too big to fail, it's time to consider whether the financial behemoths are too big to succeed. Sandy Weill spent his career trying to build the world's biggest bank, only to see it destroy billions in shareholder wealth and require federal bailout funds to keep it alive. John Reed's admission that the grandiose dreams of the bankers have turned out to be nightmares should bring pause to those who still argue that bigger is better.

Chris Dodd has introduced a bill in the Senate to overhaul financial regulation, saying the current system was "created piece by piece over decades", forgetting the parts that have been dismantled piece by piece. His draft bill has garnered favourable comments from Timothy Geithner, the US Treasury secretary, even though it differs in some respects from Barack Obama's plan. It is reassuring to see lawmakers renounce their faith in unfettered free markets and propose measures to bring order to the chaos they helped create.

The bankers who have left us with yet another mess either don't know what they're doing or, worse, have created an inherently unmanageable financial system. Either way, we have to admit that unfettered finance is too dangerous to be left to the financiers. It's time to impose new controls on those who have shown themselves incapable of self-control.