Think the Bailout Is Radical? Just Wait.

Federal Reserve Chairman Ben Bernanke addresses the the National Association for Business Economics' 50th annual meeting. (Chip Somodevilla - Chip Somodevilla/Getty Images)

That's what Hong Kong did in August 1998 to combat speculative attacks on the territory's currency. By the time it was done, the Hong Kong Monetary Authority (its equivalent of the Fed) owned 7 percent of the shares in the territory's benchmark index. The dramatic move seriously dented the territory's laissez-faire reputation: Milton Friedman called it "insane." But it worked. Hong Kong's currency peg with the U.S. dollar survived, and Hong Kong made a profit. It remains a major shareholder.

Could Washington follow suit? The United States once routinely waded into foreign-exchange markets and is now intervening in the mortgage markets through its bailout of Fannie Mae and Freddie Mac. But buying stock is a bigger leap: There's a greater chance of capital loss, and outright purchases enmesh the government in issues of ownership (one reason investing the Social Security Trust Fund in stocks remains controversial). Though U.S. government purchases might drive up stock prices and help banks issue new shares to rebuild capital, they would not address the root of the credit crisis.

A more elegant way to use Washington's purchasing power would be to buy vacant homes and take them off the market to alleviate the downward pressure on housing prices. Of course, doing so without overpaying would be tricky indeed.

Stop trading. In a drastic recent step, the Securities and Exchange Commission temporarily banned "short-selling" of financial companies' stocks. Short-selling involves selling borrowed shares in hopes of replacing them later at a lower price -- in effect, a way of betting on a company's demise. Short-sellers do help keep markets honest, although corporate executives view them in much the same way as a starving man in a desert sees a gathering flock of vultures. Since many short-sellers simultaneously buy stocks or other securities, the SEC ban probably hurt the market more than it helped. The timeout opened up the door to the more radical idea, raised by Italian Prime Minister Silvio Berlusconi, of halting trading altogether.

The idea has precedent. In 1914, with war approaching in Europe, Treasury Secretary William Gibbs McAdoo feared that European countries would seek to raise funds by selling U.S. stocks and worried that the resulting outflow of gold would break the dollar's link to the metal. So he closed the New York Stock Exchange for four months, long enough for the newborn Fed to accumulate its own stash of gold to defend the dollar. William L. Silber, the author of "When Washington Shut Down Wall Street," argues that by keeping the United States on the gold standard, McAdoo's daring move helped establish the dollar as an international reserve currency to rival the British pound.

But McAdoo is not much of a model for today. Silber notes that stock-trading did not stop: An informal cash market in NYSE shares sprang up on a nearby street. Today, a trading halt would have to be global to be effective and would probably still be a bad idea: The inability to trade robs investors of vital information (not to mention access to their cash), which can cause more panic than even a sharply declining market.

The moral of all these stories is not just that far more radical action is available to the government. It's also that such bold steps are hardly irreversible. Even France's taste for ownership eventually waned. In 1986, conservatives began to sell off state-owned enterprises in part because some of them, especially the banks, needed capital. By the time the massive bank Crédit Lyonnais (nationalized in 1945) was privatized in 1999, it had cost the French government as much as $16 billion in bailouts. France has shown little taste for owning banks again. Under the bailout plan announced this past week, the French government will take stakes only in weak banks and sell them when the crisis is over.

A future U.S. administration may use its new ownership stakes to press banks to relent on foreclosures or lend more to favored constituencies. But ownership will also make Washington the target of demanding interest groups and disgruntled customers and shareholders if the banks stumble.

Indeed, while bankers' reputations are at a low ebb, Americans don't seem any more trusting of government as a result. In a Pew Research Center poll this month, 57 percent of respondents agreed that the government is "almost always wasteful and inefficient" -- up from 47 percent in December 2004. The odds are that once this crisis passes, the United States will return to its free-market roots, albeit with more regulations in place. But until then, things may get even wilder.

gregip@economist.com

Greg Ip is U.S. economics editor of the Economist.