Faith in free markets dates to the early days of the republic.


Throughout the history of American commercial life, one cultural trait has tended to dominate: Americans are optimists.

This exuberance has proven beneficial, emboldening risk-taking that has achieved innovation and wealth.

Yet in recent times this eagerness to augment the present by borrowing against a seemingly lucrative future has reached dangerous levels. Excessive optimism and a reckless disregard of risk are widely blamed for helping carry the United States into the worst financial panic since the Great Depression. Millions bought homes they could not afford. Financial institutions bet trillions in borrowed funds while leaving little in reserve.

This month, as President Obama stood near the New York Stock exchange to champion new regulations for the financial system, admonishing bankers not to “go back to the days of reckless behavior,” he effectively challenged a deep-seated notion of the American identity: that Americans are resilient enough to operate free of bureaucratic intrusion.

“It goes all the way back to George Washington,” said Robert Shiller, the Yale University economist who warned of the Internet and real estate bubbles, and whose book, “Irrational Exuberance,” remains a seminal text on Americans’ tendency to believe in good times. “Washington said regulation should be done with a light hand. The word capitalism hadn’t been invented yet, but freedom had. Washington said businesses should be free. There’s this hatred of kings that we really have in our blood.”

In the first months of the contemporary financial disaster, some assumed that the United States was suffering the financial equivalent of 9/11. Life savings were sliced in half, millions of workers lost their jobs, and homeowners confronted foreclosure.

In some quarters, the sense took hold that household wealth had been looted by Wall Street while the regulators sat mute. Financial institutions had been allowed to operate a casino, collecting profits while sticking taxpayers with the eventual losses.

History seemed to indicate that change was on the way. After the Panic of 1873 - which saw a run of bank failures and soaring unemployment - labor unrest lasted for decades.

Three decades later, the Panic of 1907 saw prominent American lenders collapse, leading eventually to the creation of the Federal Reserve, a central bank to watch over all others.

“Traditionally, the idea of a central bank had been repulsive,” said Kenneth S. Rogoff, a Harvard University economist and co-author of an international survey of financial crises, “This Time Is Different: Eight Centuries of Financial Folly.”

The Great Depression so tormented Americans that it delivered the New Deal, a muscular collection of government programs whose hallmarks - unemployment insurance and Social Security - remain the primary components of the modern social safety net.

The banking crises of the 1930s prompted the passage of the Glass- Steagall Act, which divided investment banks from deposit-taking banks to prevent rampant speculation with ordinary people’s savings. (Many economists believe the final repeal of Glass-Steagall in 1999 played a crucial role in the reckless investment that triggered the latest crisis.)

The shock that accompanied the end of the American real estate boom once seemed likely to bring tighter government scrutiny of the financial realm. Yet as fear of catastrophe fades, the question is how quickly the momentum in Washington for tighter financial rules is diminishing.

The era of lightly supervised markets was fabulously lucrative for those positioned to capture a piece. Financial services and real estate swelled into major sources of employment, while boosting stock portfolios for huge institutions and ordinary people alike.

“There are a lot of complex emotions at work,” Mr. Rogoff said. “Certainly, we’re terrified of the crisis. On the other hand, the United States has been a big winner in the global financial arena, and why change the rules when you’re winning?”