The biggest financial news  in this or any recent year:

The U.S. government is expected to buy stakes in the nation’s top financial institutions as part of a wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments that sent global stock markets soaring. As part of its new plan, the government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp., Merrill Lynch, Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street, according to people familiar with the matter. Not all of the banks involved are happy with the move, but agreed under pressure from the government. All told, the moves tie the banking sector to the federal government for years to come. The comprehensive approach rivals the breadth of the government’s response to the Great Depression. As a result, taxpayers now have a direct stake in the future of American finance. Along with the government’s involvement come certain restrictions, such as caps on executive pay.

Couple that with a guarantee of inter-bank loans for the next few years and unlimited FDIC insurance for non-bearing interest accounts and you have a wholesale refashioning of the federal role in our economy. All of this has enormous short term and long term financial and political ramifications. Most immediately, will this build on the banner day yesterday in restoring confidence to the markers and loosening credit? That’s the betting and the initial reaction from the Asian markets. And if that in turn helps staunch the bleeding in the markets will this affect the presidential race in any meaningful way? At this late date, I suspect not enough for John McCain.

But in the longer term we are entering a new era of government involvement in our financial sector, one not likely to be easily reversed, at least not soon. Both political parties may need to reassess and chart a slightly different course. We will see if the federal  government’s new role  as a major stockholder makes Democrats any more responsive to the needs of business. (They have a big investment in these institutions’ success after all.) Likewise, will it make conservatives’ “limited government” mantra looks like a quaint relic of the past? We are about to find out.

For John McCain this appears only to magnify his difficulties. If a Republican administration is embarking on the greatest expansion of the federal government’s responsiblities in a couple of generations, is there any appetite for his budget-cutting, earmark-scouring agenda? There is a certain disconnect between harping over millions in pork while the Administration spends hundreds of billions in the brave new world of government investment. On the brighter side, now is probably as good a time as any for McCain to query Obama whether he really thinks there’s a trillion dollars lying around for new domestic spending or a justification for tax increases at the very moment every government in the West is trying inject liquidity and jump start the private sector.

Suffice it to say a massive shift in the relationship between government and the private sector is probably not what conservatives thought would be a lasting legacy of the Bush Administration.

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