Should fractional-reserve banking be banned?

Paul Krugman posted yesterday a criticism of the argument that we should ban fractional-reserve banking (which occurs when you make a deposit in your checking account and the bank is allowed to use most of that money as its own).  It turns out I am slowly working my way through the book Money, Bank Credit and Economic Cycles by the economist Jesus Huerta de Soto at the Rey Juan Carlos University of Madrid which seems to argue (I've only worked through the first 3 chapters so far) we need to ban fractional banking for demand deposits (such as checking accounts) to eliminate the boom-and-bust nature of short-run macroeconomic fluctuations (the 2001-2007 was the latest boom, 2007-present is the latest bust).  I'm not ready to advocate his position, but it is an interesting one that I think Krugman dismisses too easily.  In particular:

• Krugman argues that a fractional-reserve banking system with proper regulation has did well from the 1930s to the 1980s when we started deregulating that system.  I agree - It did do well.  My concern however is that such a system depend on a certain level of economic sophistication on the part of Congress to create and maintain such a system, and it is not clear to me over the long haul we can trust in that level of sophistication.  There is a tendency for politicians and regulators to come under the influence of the very people they seek to regulate (this is what is known as the capture theory of regulation).  Of course, whether the system Huerta de Soto advocates would be more stable, I don't known.  Talk to me after I've finished the book!
• Krugman also argues that eliminating fractional-reserve banking would shut down the ability of business (and households) to have access to liquidity and thereby slow down the economy.  First, eliminating fractional-reserve banking would only keep banks from loaning out demand deposit funds, not time deposits (that is, loans to banks).  Nonetheless, I think it is true that it would reduce the availability of liquidity, though I suspect not as much as Krugman believes because in such a world, interest rates would rise and induce some of those demand deposits to be converted to time deposits (that is, loans to banks).  But in any event, I believe, Huerta de Soto's point is precisely that with fractional-reserve banking, money is made too plentiful.  How can it be too plentiful?  If I understand his argument, it is that investment is ultimately a real (as opposed to a monetary) phenomenon that uses real, physical resources.  And that requires savings, that is, deciding not to use all our resources to produce consumption goods.  He then argues that fractional-reserve banking allows money to be created by banks that gives the illusion that there are more real resources available for investment that then are (since savings does not in that process increase).  And that leads to the boom that ends up in the bust.   Again, I haven't come to a conclusion on this issue, but I do believe that simply saying that liquidity would be reduced is not necessarily a bad thing.
• Krugman also argues against the feasibility of eliminating a fractional-reserves system, stating, for example, "So, are you going to ban fractional reserve strategies by money market funds? Are you going to ban repo? Auction rate securities? Where does it stop?"  But eliminating fractional-reserve banking does not mean eliminating money market funds or other such instruments.  It does argue for making a clear distinction between demand deposits and time deposits, with the former being backed by 100% reserves, and the latter being explicitly a risky act of saving and investment.  As I understand it, Huerta de Soto's argument is that it is the money creating power of banks that leads to the (increased) volatility in the macro economy.  By having 100% reserves on demand deposits, that power is eliminated, and so the volatility is reduced.  I haven't worked through this argument yet, but so far I'm not persuaded that Krugman's concern is valid.
• Krugman then argues that banning fractional-reserve banking would drive such activities underground and make them harder to regulate.  First, it is clear from Huerta de Soto's history of banking that there are strong motivations on the part of banks to engage in fractional banking.  (Give one to Krugman!)  But, it is also true that the regulatory system that Krugman argues for has been less than perfect.  Thus, it has allowed a lot of banking activity to exist outside the regulatory system, and that's why we had the crashing in 2008.  That is, to be sure, the result of political influences, but that's the point.  Regulation looks good on paper but is not so good in the real world of (imperfect) politics.  Would a system that requires explicit noting of the nature of financial transfers as demand deposits or loans to banks/bank-like institutions along with a 100% reserve requirement for demand deposits be any more effective or any less susceptible to political manipulation?  I don't know, and my sense is this is the fundamental issue.
• Finally, Krugman argues that the anti-fractional reservists are behind the times.  I agree that for many (most?) of them, there is an emotional belief in the halcyon days of yore that clouds their thinking, and that a clear look at those days of  yore reveals they weren't that halcyonic (how's that for a word!).  But, that does not mean that the current way we organize ourselves is always the best and that we cannot learn from those who came before us.  Indeed, the Renaissance was the result of an attempt to bring back the best of ancient Greece and Rome, and it produced some good stuff.  Rather than argue for or against something because it is new or because it is old, it would be better to look at the substance of the argument.  Huerta de Soto's conclusions may or may not be right, but his method is - a clear, explicit analysis of the issue from a conceptual, empirical, and historical perspective.