Efforts to regulate 'Wild West' markets are long overdue

Mr. Dionne likes to quote former Republican Sen. William Cohen of Maine: "Government is an enemy until you need a friend."

Some Wall Street firms and mortgage brokers have exploited loopholes in Sarbanes-Oxley and other laws to get rich on fees arising from the sale of subprime mortgages and then selling these risky assets to pension funds and other investors around the world.

Gross says PIMCO managed to avoid buying these faulty investments for its mutual fund portfolios. And he cheers the efforts to prevent such abusive lending practices in the future in order to protect investors. "It got to the point where anything goes," he says. Tighter regulation "is more than overdue."

Mickey Edwards, a former Republican congressman and author of a new book, "Reclaiming Conservatism: How A Great American Political Movement Got Lost – And How It Can Find Its Way Back," basically agrees. He sees it as true and legitimate conservatism for government to protect the public from exploitation by "quick buck" financial operations. He criticizes those "who call themselves conservatives … but would let business do what it wants." And he approves of the Fed's moves to rescue government-­sponsored Fannie Mae and Freddie Mac.

"The worst thing that can happen now is to let all of this [the financial mess] to get out of control," he says.

Harald Malmgren, a Washington economic consultant, cautions, however, that Congress should not rush to embrace regulatory reforms now proposed by Paulson and Bernanke. It was the Fed, he says, that allowed credit quality in the mortgage market to deteriorate so badly as borrowers were subject to less and less scrutiny. Fed officials "were asleep," Mr. Malmgren says. Though they talked in 2005 about the problem, "almost in panic," they procrastinated and did nothing about it. Officials of the Securities and Exchange Commission were also "sleeping on the job," he says.

In the present crisis, the Fed has taken on a new regulatory role in regard to investment banks, and now is involved in the rescue of Fannie Mae and Freddie Mac. The regulatory framework that rises from the ashes of the present crisis will play "a pivotal role" in world capital markets, says Malmgren. Since these markets are now internationalized, regulators and Congress face "a certain degree of challenge" to US financial sovereignty. Globalization could require "enhanced cooperation" with central banks and regulators abroad in major financial markets, such as London and Frankfurt.

The oddity of today is that a Republican administration is pushing an expansion of government regulation. Dionne hopes that whatever emerges in Washington will protect citizens better from Wall Street fraud and foolishness.

"A well-functioning capitalist system relies on clear rules," he says.

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