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With finance crisis, hands-off era over

More oversight lies ahead, no matter who's in the Oval Office.

SOURCE: Dow Jones/AP

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The great financial shakeout of 2008 – one of the most dire US fiscal crises of modern times – is likely to change permanently the relationship between Wall Street and Washington.

Already Treasury Secretary Henry Paulson has overshadowed New York's titans of finance with his decisions as to which institutions will get government aid and which will not. If things don't get worse, history may credit Mr. Paulson with helping to pull the economy back from the brink, as financier J.P. Morgan did in the Bankers' Panic of 1907.

Beyond that, a long period of Washington laissez faire toward financial markets may well be at an end. The details of regulation could be different, depending on which candidate wins the White House this fall. But more US oversight seems inevitable.

"We need to restructure the system to reduce the chance of having another crisis," says Douglas Elmendorf, a senior fellow in economic studies at the Brookings Institution.

Financial regulators may win access to more internal information from financial institutions, allowing them to better judge the risks they are running. They may also look for ways to control derivatives, financial instruments backed by mortgages or other types of assets, which have become complex "to the point of absurdity," in Mr. Elmendorf's words.

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