Irwin Stelzer, newspaper columnist and Senior Fellow of the Hudson Institute, was our guest at a crowded Power Lunch in Westminster this week. As you'd imagine, the discussion focused round the current turmoil in the financial markets, what governments were doing about it and what if anything they should do about it.

As someone who believes this mess is all caused by too much regulation, I was in a minority of about one (two, perhaps, counting the financial commentator Terry Arthur). There seems to be a general feeling that, for good or ill, the world has changed, that we are going to get more regulation, and that arguments about economic efficiency are cutting less ice than arguments about safety and equity. The trick, then, is to try to make sure that however the politicians do decide to ratchet up regulation, we make it as least damaging as possible.

That's a tall order, because everyone has their own wish-list. The US government has been so anxious to get its bailout package agreed that Congress has them over a barrel. Let's help homeowners while we're at it.  Stimulate the housing market. Generate jobs. Slash the bonuses of these vile bankers. And of course generally toughen the rules so that innovation and the smooth flow of capital around the planet are squashed under their weight.

We have some ideas on ways that financial regulation could be improved without gumming up the whole system. There are indeed perverse incentives to be fixed (like those rating agencies who mark everything AAA because that's what they get paid for, or the brokers who put quantity over quality). But I also think we have to be robust in defending the market system. Maybe the lunchtime critics were right that the mood has changed and we can't resist another tide of regulation. But we can still capture the mood that government is getting involved in too many things, and as a result doing them badly – and that taxes are already too high and too complicated. I for one am not afraid to argue for a smaller state.