Financial Crisis

This past week marks a decisive turn in the evolution of American capitalism.

Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression...

Also scrapped is the notion that government's role is to get out of the way, limiting itself to protecting consumers and small investors, setting the rules of the game and stepping in -- only rarely -- to cushion the economy from shocks like the 1987 stock-market crash or the 1998 collapse of hedge fund Long-Term Capital Management. Both of those episodes involved government jawboning and flooding the markets with money. In contrast to today, neither time did the U.S. take significant amounts of taxpayer money or anything approaching the nationalization of a major firm...

It is too early to say whether Mr. Bernanke and Mr. Paulson have made the right call and will bring the crisis to a close, despite global stock markets' ebullient reaction Friday. If the fear does subside, then talk will turn to writing new rules for a financial system that has changed more in the past six months than in the previous decade. The government has bailed out financial institutions -- and particularly their creditors -- and taxpayers will pick up the tab for many of the institutions' bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.

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