The first lesson to take from Tuesday's historic action by the Bush administration is that Washington is capable of learning. Instead of doing nothing, on the grounds that the market will take care of itself, Washington applied the lesson of the Great Depression and announced a dramatic intervention plan to restore confidence in the financial system.
If in doing so, the administration acted more like liberal Democrats than far-right Republicans, that too is an acknowledgment that, sometimes, there is no substitute for the power and reach of big government. Indeed, the administration's reluctant decision to buy $250 billion worth of shares in the nation's leading banks reflects a strategy crafted by an acknowledged liberal expert, British Prime Minister Gordon Brown, who was previously his government's top financial official, the chancellor of the exchequer.
Brown became the first national leader to propose an integrated plan to confront the international financial crisis, announcing last week that the government would inject tens of billion of dollars into wobbly British banks, thus taking an ownership stake in them. His government also put up hundreds of billions of dollars to guarantee the banks' loans.
That approach quickly spread around Europe and, as of Tuesday morning, to this country. Its adoption marked a reversal for Treasury Secretary Henry M. Paulson Jr., who had opposed that strategy earlier this month.
In announcing the plan, President Bush declared that "These measures are not intended to take over the free market, but to preserve it." That was precisely the goal of Franklin D. Roosevelt in launching the New Deal. Washington has also offered unlimited federal insurance for non-interest bearing accounts, mainly used by businesses, and insisted on compensation limits for bank executives.
Bush said the ownership stake in the banks would be "limited and temporary," which is exactly the right approach. The government should exit the banking business as quickly as it can, recouping a profit for taxpayers if possible.
The point of this strategy, part of the $700 billion bailout bill approved earlier this month, is twofold. It is designed to ease the credit crisis that has threatened businesses as well as individuals, whose ability to finance cars, houses and other large purchases was undermined. Less immediately, but also critical, it is designed to rebuild confidence in the financial system, whose meltdown had become self-perpetuating.
To accomplish these goals, Washington will have to monitor the banks to ensure they use the new money to offer new loans, and not simply to balance their lopsided books. As a new shareholder of unusual influence, the government will have to be prepared to apply pressure, moral and regulatory, as needed.
Better late than never.