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Credit crisis overturns free-market ideology

The next president will decide whether the shift away from laissez faire is permanent.

By Staff writers of The Christian Science Monitor, Ron SchererStaff writers of The Christian Science Monitor / October 15, 2008

Pragmatists: Fed Chairman Bernanke (left) and Treasury head Paulson talked of new moves Tuesday.

Gerald Herbert/AP

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Washington and New York

George W. Bush, meet Franklin Delano Roosevelt.

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With its sudden and sweeping plan to pump $250 billion directly into America's banking system, a Republican administration in essence may have opted for a New New Deal, intervening in private markets to an extent not seen since the days of the Great Depression.

The world financial system remains so fragile that a free-market-oriented White House felt it had no choice but to resort to this partial nationalization. Now the actions of the next administration will determine whether the move is temporary or a turning point in the US government's attitude toward laissez-faire economics.

"You do what you have to do. It will be judged by its long-term consequences," says says Bruce Bartlett, a former economic adviser to Presidents Ronald Reagan and George H.W. Bush.

The move was the latest, and the biggest, in a long series of rescue attempts taken by the administration and the US Federal Reserve over the last several weeks in the wake of extreme stock market volatility and frozen credit markets.

President Bush announced the new plan in televised remarks before the opening of the New York Stock Exchange on Tuesday. He and his economic team described the bank intervention as something intended to preserve the free market, not bury it.

Their distaste for the partial nationalization was obvious. Only weeks ago, Secretary of the Treasury Henry Paulson explicitly rejected in a congressional appearance the notion of injecting funds directly in banks. Now he was proposing that same thing.

"We regret having to take these actions," Secretary Paulson said. "Today's actions are not what we ever wanted to do – but today's actions are what we must do to restore confidence in our financial system."

Under the new multifaceted stabilization program, the government will initially buy stocks in major US banks. Nine banks have agreed to participate. Smaller banks and thrifts will also be able to get involved in the federal buy-up program.

When financial markets stabilize and recover, the banks are expected to buy the stock back from the government, according to administration officials.

In addition, the Federal Reserve announced it will begin buying vast amounts of commercial paper on Oct. 27. This short-term debt is a crucial form of funding that many companies use to pay workers and buy supplies.

Clearly, the US government is moving to try anything and everything it thinks might work to keep the country and the world from falling into a deep recession.