Regulators thought that the interconnected economy would absorb and diffuse risks. Instead, these interconnections and use of exotic financial instruments no one understands -- coupled with the moral hazard created by the repeal of Glass-Steagall, which allows would-be lords of the universe on Wall Street (their term, not mine) to play with taxpayer-insured deposits at commercial banks -- has force-multiplied local or individual financial problems into world-wide financial crises. No more firewalls or fire breaks-- we now have connections that act as flash-points or accelerants. That so-called moral hazard is amplified when big banks take even bigger risks when they know that they are too big to fail.

But, as Morgenson concludes, not to worry, there's always you and me:

Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s — current problems, overseers like the Fed undermine a little bit more of that confidence.[...] That will leave the taxpayer, alas. As usual.

I can only wonder whether the ever-growing financial crisis and pending recession will cause Congress and regulators to re-visit the wisdow of breaking down those Glass-Steagall walls in 1999's Gramm-Leach-Bliley Financial Services Modernization Act.

Sorry, I can't comment on every interesting story on this bailout. One more to check out is by Edmund Andrews in the New York Times. He points out in Fed Chief Shifts Path, Inventing Policy in Crisis that while Fed Chair Ben Bernanke once relied on "consistent principles," he now "is inventing policy on the fly."