Each succeeding generation seems to have to make that choice, depending on the business cycle and the severity of booms and downturns.

In the present world recession the context is so severe that it’s become a crisis in both the financial markets and the real economy. Many governments are having to nationalize part or all of their banking systems. Financial services never seemed so brittle.

Is that really the case though? In a well-argued article, The world needs Up-To-A-Pointism, John Evans suggests that by staying within the boundaries where governments and free markets work best, the world would be a much more stable place to live and do business.

Although mostly mutually-exclusive, the interface between regulation and free markets could be made to operate more efficiently, to the benefit of both.

Update: The rescue package was finally passed by Congress and is currently being implemented, with some changes allowing equity in banks to be bought by the government.

Wall Street is back in panic mode again after politicians failed to secure a rescue package for the distressed banking sector last night.

The scenes in Washington were close to farcical as senior members of the administration had stand up rows in the White House. Treasury Secretary, Hank Paulson, reportedly went down on one knee and begged Democrat Nancy Pelosi to pass the bill.

Her response, “Ask the Republicans,” was met with a bewildered “I know, I know” from Paulson.

The $700 billion bank bailout bill is meeting determined opposition from many quarters, in particular a group of Republicans who say the public is 100 to one against the deal.

Negotiations start again today and may spill over into the weekend.

U.S. investment bankers have almost disappeared off the face of the Earth. The so-called Masters of the Universe only have themselves to blame, of course.

Last week a “flight to safety” of investors in America’s $3.5 trillion Treasury money market was only halted by Secretary Henry Paulson’s swift action in nationalising the banking sector’s bad debts.

Read The Great Harvard Sausage Scandal 2008 over at Syntagma.

Today we hear that the two surviving giant American investment banks, Goldman Sachs and Morgan Stanley, have turned themselves into “holding banks”, which will allow them to beg on the streets for any deposits we the people may have remaining after their Attila the Hun rampage through our domestic balance sheets. They will also gain access to Government funds designed to bail out the banks.

In common parlance, Goldman and Morgan and the other stricken titans are signing on the dole.

Read the rest of the article.

Yesterday the U.S. Treasury Secretary, Henry Paulson, nationalized the underwriters of half of America’s vast mortgage industry, now in precipitate decline.

Secretary Henry Paulson at news conference yesterday

Two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have had their books underwritten in the short term by the Government.

Fannie and Freddie are curious institutions. They don’t lend money but underwrite half of U.S. mortgage lending. This amounts to a staggering $5.2 trillion (£2,940 billion) of debt. The two companies are a kind of buffer zone between mortgagees and the real world of finance.

Since the Great Depression, the Government has tacitly made it known that it will support Fannie and Freddie through any adversity. Now that wink has become explicit — until the end of 2009.

So the managers of these enterprises are out, and the shareholders are sent to the dogs, losing 79.9 percent of their holdings to the Treasury. The bondholders — most central banks and commercial banks around the world — are safe, by Government decree. The alternative would have been a liquidation of dollar holdings on an unimaginable scale.

Predictably, bank shares have risen sharply around the world, while the dollar has lost some of its recent glitter in the markets, reflecting the new self-imposed straitjacket binding the Government’s hands for the foreseeable future.

Henry Paulson explained the thinking behind the move. “Fannie Mae and Freddie Mac securities are held by central banks and investors around the world. Investors have purchased securities of these enterprises in part because the ambiguities in their congressional charters created a perception of government backing. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and mortgage-backed securities.”

He has also committed the Treasury to pumping up to $100 billion into each of the GSEs in the event that their capital ratios fall short.

Fannie and Freddie will now be able “moderately” to increase their lending.