WSJ - Government Now Rooted In The Economy - Bailout Mentality

In 2008 and 2009, Washington strove to save the economy.

In 2010, Americans will get a clearer picture of how Washington has changed the economy.

Only as the recession recedes will it become fully evident how permanently the state's role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.

One thing is clear: The government is a much bigger force in today's U.S. economy than it was before the financial crisis.

"The frontier between the state and market has shifted," says Daniel Yergin, whose 1998 book "Commanding Heights" chronicled the ascent of free-market forces starting in the 1980s. "The realm of the state has been enlarged."

Washington pumped $245 billion into nearly 700 banks and insurance companies, guaranteed almost $350 billion of bank debt, made short-term loans of more than $300 billion to blue-chip companies, propped up life insurers and money-market funds, bailed out two of the three U.S. auto makers, lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending, and in two February stimulus bills enacted a year apart, committed $955 billion to rouse the economy.

Today the U.S. government, directly or indirectly, underwrites 9 of every 10 new residential mortgages, nearly twice the percentage before the crisis.

Just last week, the U.S. Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.

John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government's role will be huge. "While we may be past the emergency, we're still in a mode that will create similar interventions for quite a while, even for minor emergencies," he says. "We have a bailout mentality in this country."

Even if the government withdraws, business will expect bailouts in the next crisis, and that will inspire another round of cavalier risk-taking.

"If we don't re-regulate the banking system properly, we'll either get very slow growth from overregulation, or another financial crisis in just 10 to 15 years," says Kenneth Rogoff, a Harvard University economist and co-author of a new book on financial crises since the Middle Ages.