Bill Clinton declared that the era of big government is over. George Bush is bringing it back.

With America facing the largest financial crisis in a generation, it’s striking that free market ideology offers no answers. Virtually no one is arguing that the government should just let these companies fail. Scholars from at least one prominent conservative think tank are declining interviews, according to Marc Ambinder. As Treasury Secretary Hank Paulson put it, “Raw capitalism is dead.”

The centerpiece of Paulson’s plan announced today is a new agency to buy up troubled mortgage assets. The idea is to take bad assets off the hands of financial institutions, restoring confidence in their books and thawing frozen credit markets. It’s a more systemic and proactive approach than we’ve seen in the past week. Paulson estimates that no more than $500 billion in assets will be bought, but some outside experts put the figure above $1 trillion.

Paulson is right to call for aggressive action that is proportional to the scope of the problem. We have no other choice. But there are more questions than answers about how this will work in practice.

One central question: how will Treasury set a price for these assets when the market cannot? If the price is too low, financial institutions will be forced to swallow unnecessary losses. If it’s too high, irresponsible investors will walk away with ill-gotten profits while taxpayers take a bath. Answering this question is the key to determining whether today’s proposal is closer to the bailout of Chrysler (which netted the Treasury a small profit) or the bailout of the savings and loans (which cost taxpayers $125 billion).

Financial aid should not start and stop with large financial institutions. It's American families who are feeling the most pain, and helping them -- like helping financial institutions -- will strengthen the economy. Homeowners are the first priority: we need to rewrite mortgages to make them affordable, and we need to do it in batches. Case-by-case changes are too slow. We also need to head off the damage foreclosures cause neighbors and communities by buying and rehabilitating those properties. Congress should also follow rapidly pass expansions of unemployment benefits and investments in clean-energy jobs.

The immediate consensus behind passage of Paulson’s plan shows that, when it comes to addressing our country's most urgent problems, money is no object. Congressional leaders did not blink at the 12- or even 13-digit outlay. We should remember that when it comes to other priorities, such as universal health care. The problem is a lack of political will, not a lack of resources.

The tragedy is that none of this was necessary. Regulators looked the other way when investors borrowed heavily to increase their potential profits, ignoring the growing risk of failure and its impact on the economy. They failed to prohibit mortgages that could never be repaid and to head off the resulting wave of foreclosures. It turned a blind eye to fraudulent short-selling and to rating agencies giving top grades to shaky bonds.

President Bush today tried to discourage these criticisms by saying, “There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.”

That’s obviously a self-serving view for the man who’s watched over the economy for the past eight years. It’s also wrong: finding the holes in our supervision of Wall Street will allow us to patch them. It is the job at hand, not a distraction. 

--James Kvaal