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With finance crisis, hands-off era over

More oversight lies ahead, no matter who's in the Oval Office.

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The crisis management of the Treasury Department and the Federal Reserve appeared to have stabilized markets, at least for the short term. Though the Dow Jones Index fell over 500 points on Sept. 15, the sell-off was orderly and could have been worse, according to analysts.

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But major Asian and European bourses also suffered sell-offs and the fate of the insurance giant American International Group remains in question, following the Lehman Brothers' bankruptcy and the sale of Merrill Lynch to the Bank of America.

By declining to use government funds to help Lehman, Washington ensured the financial crisis would enter a new and perhaps decisive phase. But it was the right step to take, said some analysts. While Bear Stearns collapsed quickly, Lehman's problems have developed over time. Any firm that stands to lose money due to interrconnections with Lehman may have only itself to blame.

Or, such firms may have been counting on a government bailout.

"To the extent that there were any major players in the market not prepared for Lehman Brothers' demise, that would be the clearest signal that moral hazard had begun to sink into the market. So it was the right decision to not step in with financial guarantees for Lehman," says Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations.

Looking forward, Washington may need to set up a temporary new agency capable of buying and selling the toxic mortgage-backed assets that are dragging down Wall Street firms, said former Federal Reserve chairman Paul Volcker in a Sept. 15 speech. Such an agency would be similar to the Resolution Trust Corporation, the US-backed clearinghouse that helped move the nation through the savings-and-loan crisis of the 1980s.

But others say Washington shares some blame for the current crisis. Under longtime head Alan Greenspan, the Federal Reserve stood by while the housing market overheated, charges University of Maryland economic historian David Sicilia. Nor did the Fed talk about regulating derivatives or hedge funds until it was too late, in Sicilia's view.

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