I think that this is the kind of cronie-capitalism that Ayn Rand and her modern day followers attack. Their idea is that capitalism is good in a purer form where large inefficient businesses are simply allowed to fail.
In fact this is a major theme of "Atlas Shrugged," that the government supports weak businesses run by cronies of political leaders.
This wasn't government arranging favors for large, well-connected businesses. It was large, well-connected businesses arranging favors for each other, at the expense of everyone else. What's happening now is the government putting a stop to it.
You may believe that there's some alternative to government regulation that would prevent this sort of thing happening --- but to date, that's what's worked most effectively, and Rand & co. would take it away.
I think that Rand is an excellent writer and she does have interesting, if idealistic, ideas. That said I have not drank the Rand cool aid. For example, the idea of totally dismantling the EPA (current republican political plank) grosses me out. Also, one of the few valid functions of government is to enforce a small set of laws. Remember that 50K new government regulations were created in 8 years of W. Bush and I am confident that it will be as bad at the end of the Obama administration. There really are no absolutes: different philosophies all have their own strengths and weaknesses, but in different ratios :-)
I certainly agree with you that this is a long term trend but in my lifetime (I am 60) it seems to have become much worse in the last couple of decades.
I try to take Rand with a grain of salt, but do find myself associating to her work more and more these days.
This LIBOR scandal feels like a rather typical case. We set up stupid crooked rules, incentivize people to break them and appoint regulators to prevent the same. And when this mess blows up we blame it on "capitalism" and say we need more regulation.
I think the limits of financial and regulatory "architecture" are similar to those of software architecture; there's a tradeoff between the desired properties of a system and its complexity - and your complexity budget is not infinite. You cannot have every combination of desirable properties you can dream up. There will be combinations that are too expensive. The example here is that we want a reference rate called "LIBOR" that is set by the market, but that is defined for every point in time. That's just not possible, because markets can freeze up. When there are no transactions there is no market rate. Either we accept that or we go down the road of increasing complexity, "panels of banks" emulating a market, the inevitable failures, more regulations and complexity in a never ending downward spiral... At least that's my feeling. :)
In fact this is a major theme of "Atlas Shrugged," that the government supports weak businesses run by cronies of political leaders.