Of course, Krugman gets it, and he's not alone.
Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.
It's not the technical difficulty - I mean this really aint rocket science - that keeps Austrians and Libertarians from realizing that robust regulation is absolutely necessary to keep capitalism functioning. It is their wilfull inability to recognize reality.