The good news is that the bail-out of Wall Street will probably save us from an imminent collapse of the financial system. But it raises disturbing questions. To what extent will it transform financial sector default risk into sovereign risk? What are the long-term implications for economic growth? How will foreign investors react if the gamble does not pay off? And what effect will it have on structure and incentives in the financial sector?

Under the proposed scheme, the US government will buy up any private sector debt securities from distressed US-based financial companies at a discount, with the intention of selling them later. Theoretically, the government could make a profit and rescue the financial sector at the same time.