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Paulson crafts his new role

In essence, Congress is telling him to create his own financial recovery plan.

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As to further reforms, the coming push in Congress for new financial regulations will rival FDR's New Deal in its scope, said Rep. Barney Frank, chairman of the House Financial Services Committee, in an Oct. 3 discussion with reporters.

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Beginning in January, the House and Senate will hold a series of hearings to determine what caused the current financial crisis, and what reasonable regulations will be needed to prevent it from happening again, said Democratic leaders.

In addition, lawmakers will wrestle with what sort of institution replaces the now US-owned housing giants Fannie Mae and Freddie Mac, said Mr. Frank.

"We have to rewrite housing finance in America," said Frank. As to what this may mean for Wall Street's raucous entrepeneurist culture, consider the fate of Morgan Stanley and Goldman Sachs.

As investment banks, Goldman and Morgan Stanley were lightly regulated. But both have transformed themselves into commercial bank holding companies, seeking safety from the credit crisis storms.

Instead of periodic government audits, they now face the prospect of dozens of regulators from the Federal Reserve and Office of the Comptroller of the Currency working permanently in their offices, peering into their business all the time.

The US will now get real-time information about Goldman's and Morgan Stanley's trading operations and financial positions.

All this Washington intervention in capitalist markets is historic, but it may be hardly unprecedented, notes Richard Sylla, the financial historian.

When World War I broke out in 1914, then-Treasury Secretary William McAdoo ordered the New York Stock Exchange to shut down. He wanted to discourage European investors from dumping their US assets in a wartime panic.

The stock exchange remained shut for four months. After the US entered the war in 1917, the government commandeered some key industries, such as railroads.

"Some see [these] incidents as the birth of big government in the US," says Mr. Sylla.

Washington acted similarly in World War II. The Treasury asked the Federal Reserve to create enough money to keep interest rates low, cutting down on war financing costs. Wage and price controls kept a cap on the inflationary pressures generated by this money creation.

But when the crisis passed, Washington retreated. The same thing may happen this time.

Regulatory cycles are long, and irregular, but eventually they turn. The New Deal of the 1930s receded after the end of the Great Depression. The thirty years of deregulation that began with the election of Ronald Reagan and continued in fits and starts through subsequent chief executives probably now has come to an end.

"If history repeats itself ... we can expect the interventions of today to be wound down after the financial and economic storms have passed," says Sylla.