With the financial system teetering on collapse, the federal government has become the backstop. "Raw capitalism is dead," Treasury Secretary Hank Paulson has said. With Paulson and Fed Chairman Ben Bernanke deciding case by case which companies the federal government will save or not, he's not kidding. After letting Lehman die, they essentially took over $1 trillion insurance giant AIG, making the taxpayers instant stakeholders in its far-flung businesses from life insurance to aircraft leasing and a ski resort.
In this environment, it's hard to resist calls for more regulation. But it has to be intelligent and measured, an extremely difficult task when the market is constantly adapting and the next excess will come in a new form. A basically solvent company, AIG was rendered illiquid by so-called mark-to-market accounting rules that say assets must be marked down to their value in the current market, even if they are ultimately worth more. This was a reform adopted in response to the Enron scandal that has worsened the current crisis.
Winston Churchill famously said that democracy is the worst system except all the others. The same could be said of capitalism. There is no way to eliminate all the human failings -- greed, exuberance, shortsightedness, fear and ignorance -- that created the predicates of this crisis and are fueling it now. If we pretend there is, we only foster another illusion.