Skip to: Content
Skip to: Site Navigation
Skip to: Search

Credit crisis overturns free-market ideology

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

(Page 2 of 2)

"Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks," said Fed Chairman Ben Bernanke.

Skip to next paragraph

The US purchase of bank stock isn't exactly unprecedented. In the 1930s, under Roosevelt, the Reconstruction Finance Corp. both made loans to distressed banks and bought into them directly.

In World War I, Washington seized railroads to ease movement of troops and military supplies. Key industries were similarly nationalized in World War II. All were returned to owners when combat ended.

In 1952, President Truman seized the steel mills, lest a crippling strike hurt the Korean War effort. The Supreme Court eventually ruled that the nationalization was an unconstitutional abuse of power.

This time, the administration was worried that its just-passed $750 billion plan to buy bad mortgage-based assets was not calming financial markets. Last week's stock plunge was so bad – the worst ever one-week fall of the Dow Jones Industrial Average – that officials felt they had to go further.

"It's the least bad of the choices they faced," says Gerald O'Driscoll Jr., who until last August was vice president of the Federal Reserve Bank of Dallas.

Mr. O'Driscoll, now a fellow at the free-market-oriented Cato Institute, finds the bailout to be distasteful. He does believe that it addresses the root problem of the freeze in bank lending, however.

"Hopefully, this will bring in more private capital [to the banking system]," he says.

For some conservatives, the important thing is what happens next. If the government backs out soon, "everything's fine," says Mr. Bartlett, the economic adviser. If the US presence in banks becomes a more or less permanent feature of the economy, however, with government officials sitting on boards or steering decisions in other ways, things could turn negative, according to Bartlett.

"Remember, rent control in New York City was enacted as a temporary measure in World War II. These things have a tendency to evolve the longer they stay in place," he says.

Although the Dow Jones Industrial Average rose 936 points on Monday, some investment professionals would not be surprised to see the stock market retest its lows. "It's going to act like a bouncing ball," says John Lekas, president of Leader Capital Corp., a money management firm in Portland, Ore. "We could see the Dow move up to 11000 then move back to 8000 then back to 10500."

Material from the Associated Press was used in this report.