The government interferes in the economy in two basic ways: to plan it and to socialize risk. In general, the political economy of the 20th century was the decline of economic planning and the rise of the socialization of risk. Planned economies such as the Soviet Union, post-War Britain, and post-War China collapsed in on themselves, ending with Winters of Discontents, failed coups, or economic revolution.
The socialization of risk, however, has been the basis of much of our economic growth. Public pensions such as social security allowed families to leave their farms and businesses, knowing that they would not starve in old age. The Federal Deposit Insurance Corporation families reinvest in the economy, rather than storing their cash under their mattresses. We seem to be on the verge of a Federal Bond Insurance Corporation, which will socialize much of the risk of bond markets away from large private institutions such as AIG. The solution may even be international.
If there is a silver lining to the financial cloud over Wall Street, it is hopefully a greater acceptance of the socialization of risk in our economy. While we should minimize moral hazard where possible, we must also realize that programs such as social security and FDIC are part of the solution, not merely a burdensome federal responsibility. The next step will probably be national health care.
Reading recommendation: A Future Perfect, by John Micklethwait and Adrian Woolridge.