U.S. bailout is bitter pill for free marketeers

By Claudia Parsons and Ros Krasny - Analysis

NEW YORK/CHICAGO (Reuters) - The government, like a knight in shining armor, rides to the rescue in a financial crisis by pledging vast amounts of taxpayers money in what has been dubbed: "The bailout to end all bailouts."

No, this isn't Thailand, Indonesia or even Italy. It's the United States, and some people are wondering if this week's dramatic events on Wall Street and in Washington spell the end of U.S.-style free market capitalism.

"It's a bitter pill for all those to claim that unfettered free markets were the best, that we don't need regulation," said Dan Seiver, finance professor at San Diego State University. "But perhaps this idea that unfettered capitalism is the way to go has finally been put to rest."

The U.S. government put curbs on short-selling and offered guarantees to money-market mutual funds on Friday as it worked on a sweeping bailout to mop up hundreds of billions of dollars in poisonous mortgage debt. That followed government bailouts of three financial giants already this month.

Stocks soared in response, led by financials.

"While Wall Street celebrates, the man in the street should be crying in his beer," said Seiver. "It's socialism for the rich, capitalism for the poor."

So far, the government has thrown well over $1 trillion at the credit crisis.

Jeffrey Frankel, an economist at Harvard's Kennedy School of Government, said the latest steps were necessary, but would impact everything from the deficit to inflation.

"These are people who, a short time ago, would have said they would never do such a thing, and mostly they meant it," Frankel said. "It had to be done. The question is to what extent it marks a shift towards more intervention."

He said there would be pressure for more regulation as a trade-off for government bailouts, but said history indicated policy makers tend to demand deregulation in good times then "bail out like crazy" when a crisis hits.

"It's millennia that people have been not fixing the roof when the sun is shining, and then when it rains saying 'I really should have fixed that hole,'" he said.

MORASS OF REGULATION

Sharyn O'Halloran, professor of political science at Columbia University, said the government action addressed the short-term liquidity crisis as well as the medium term problem of dealing with bad assets.

"On the longer term regulatory structure issue, there's no strategic thought or plan in place, and that's really what's problematic," O'Halloran said.

She said the current U.S. system was "a morass of regulation" that needs reform, not just more regulation.