The era of less government is over

If that sentence sounds familiar, it should. Back in the mid-1990s, President Bill Clinton told the first Republican-majority Congress in 40 years that "The era of big government is over."

Republicans stood and cheered. So did some Democrats. Clinton was acknowledging a political reality. The party of government had been rebuked at the polls after just two years of controlling the presidency and both chambers of Congress. The party of the private sector and the free market taking the initiative in Washington.

Over the next decade, a deregulatory spirit generally held sway in Congress, going beyond an earlier push to get government out of the marketplace in the late 1970s and 1980s. Among its more notable achievements was the repeal of the Glass-Steagall Act, a monument to the regulatory spirit of the New Deal.

Glass-Steagall was intended to rein in speculation and restrict the activities of banks in the wake of the crash of 1929 and serial bank failures thereafter. Some of the law was repealed in 1980, allowing savings accounts to offer higher rates of interest, free from regulation by the Federal Reserve. Later in that decade, further deregulation of the savings and loan industry led to a massive meltdown and the biggest financial bailout by the federal government ever. Or at least up until then.

The larger repeal of Glass-Steagall, advertised once again as a way to free the market, was achieved in November 1999 in the Gramm-Leach-Bliley Act. It dismantled those firewalls against investment abuses, regarding them as an outdated restraint on the competitiveness of U.S. financial institutions.

The full consequences of this hubris would not be apparent until this year, when they contributed to the metastasizing of bad mortgage debt through much of the nation's financial infrastructure. When Bear Stearns suddenly collapsed in March, the onset of nostalgia for Glass-Steagall began.

And since then, it has only grown worse. Much worse. Consolidation and collapse have taken all but two U.S. investment banks (Morgan Stanley and Goldman Sachs). The largest insurance operation in the world, AIG, is already essentially in government hands. So are the enormous mortgage backers Fannie Mae and Freddie Mac, those "government-sponsored enterprises" that are now part of the government.

The Bush administration has also dipped into a little-known, Depression-era fund so as to insure all money market accounts. And it has imposed at least a short-term ban on short selling in financial stocks (a move denounced by former Federal Reserve Board Chairman Alan Greenspan as "a terrible idea").

And all that is prelude to the Big One, the mother of all bailouts, expected to take shape in the next week and beyond. The federal government is going to rescue the mortgage market itself.

That's right. In this past week, as the stock market thrashed about and the credit market seized up, history turned a corner. And this time it did not even take an election to do it. Nor did it take a president.

This time, the man turning the page in the history books was a regulator.

Treasury Secretary Henry Paulson first signaled that the federal government was up to something big. Word leaked that Treasury and the Federal Reserve would back a bailout for the mortgage credit crisis along the lines of the Resolution Trust Corp., the government-sponsored solution to the collapse of the savings and loan industry at the end of the 1980s.

How big would the bailout be? In what must have been the shortest news conference of such consequence in history, Paulson told the world he was going to need "hundreds of billions" of dollars. Can anyone say, a trillion dollars?

So deep had been the sense of impending doom that the markets took the prospect of federal intervention as a shaft of light from the heavens. Paulson himself was a wizard of Wall Street before moving on to Washington, but still, here was a regulator talking about the biggest federal intervention in 75 years. And it made traders almost giddy with renewed optimism. The market went up more than 400 points on the rumor on Sept. 18 and nearly as much on the official news the next day.

Most investors were still far from whole, of course, looking back at the heights scaled in 2007. But compared with the dizzying drops they had seen, the latest trend in valuations was most welcome.

Will it still be so, after Congress has weighed in and free-market analysts have picked Paulson's prescription apart? Some of his proposals are going to bring the era of regulatory oversight back with a vengeance. Surely the defenders of laissez faire are not ready to surrender without a fight.

Still, the die appears to be cast. To quote the White House: "Our economy faces unprecedented challenges, so we are responding with unprecedented action."

Unprecedented? Not really. Just the passing of one era, and the coming of another.