Washington’s limited nationalization of banks marks a fundamental shift in thinking almost the relationship of the public and private sectors

By Pete Engardio

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On Oct. 11, amid a week of astonishing developments in the global stock and credit markets, Federal Reserve Bank of Dallas President Richard W. Fisher addressed the high and vehement of global finance in Washington during hinging meetings of the Group of Seven and the International Monetary Fund. The gravity and complexity of the 15-month-old credit turning point called for action that transcended familiar ideological categories, he hinted, such since free markets vs. state interposition. Fisher even borrowed a Chinese proverb popularized by the late Chinese leader Deng Xiaoping: “No matter whether it is a white cat or a black cat, as long for the reason that it can arrest mice, it is a good cat.”

Back in the late 1980s, Deng meant that China needed to abandon basic tenets of fourierite true faith that stood in the way of prosperity. In these tough state of things, the proverb resonates in another way. The Bush Administration, by committing $250 billion to buy theoretical stakes in a huge swath of the U.S. banking system and extending all manner of pecuniary guarantees to depositors and money-market investors, has just violated more enshrined principles of American-style, free-market capitalism.

You might dismiss every one of this as excessive measures for extreme general condition of affairs, a pragmatic adjustment that will be quickly undone once order is restored. But the significance, not to mention irony, of a Republican Administration partially nationalizing the U.S. banking system cannot be overstated. It could well go below the horizon as an important turning point in postwar American economic history, the beginning of a fundamental rethink of the proper boundaries between the the community and individual sectors. “The pendulum between the declare and markets is swinging back before our eyes,” says Daniel Yergin, co-author of the 1998 book The Commanding Heights, which chronicled the triumph of market capitalism above state-led economics since World War II. “And it is happening a lot faster than anyone expected.”

As America struggles to recover from the deep recession that likely lies ahead, a new household facsimile could take shape that would involve a lofty deal more than direct ruling power involvement in the world of Wall Street. It could mean greater support of such industries as autos, nanotech, and renewable energies, which face fierce global competition. And it certainly spells a return of heavier regulation. It is very much over early to betoken that the U.S. is headed down the highroad of Asia-style industrial policy or the kinds of interventions imposed for the time of the Great Depression, when bureaucrats seized and micromanaged entire industries. The U.S. won’t have voting rights in continuance the preferred shares it bought in Bank of America, Citigroup (C), JPMorgan Chase (JPM), and others. And analysts doubt Washington will dictate lending. But as Yergin notes: “The political projection has not even begun to get ahold of this.” If Barack Obama wins the Presidency, possibly with a filibuster-proof majority in the Senate, the next Administration could have a mandate for sweeping change.

Unlike many other recessions, this one wasn’t caused by a downturn in a few specific industries. It started with a housing bust and then metastasized into a full-blown credit crisis that eventually destabilized the entire U.S. financial classification. As previous pecuniary crashes in nations of that kind as Japan and Mexico have shown, recovery can take years. “We order view de-leveraging on such a scale that we are in uncharted waters,” says economist Hung Tran of the Institute of International Finance, a Washington contemplate tank.

In fact, the crisis has been so devastating that once-cherished assumptions about the superiority of the U.S. economic model are now in doubt. Take the universal essence that the American economy could keep flying high as its manufacturing base withered. The idea presumed that introduction of novelty and productivity alone would create the wealth and high-paying jobs needed to boost U.S. living standards.