by Bernd Debusmann

"Government is not the solution to our problem; government is the problem...It is my intention to curb the size and influence of the federal establishment."

That statement, in Ronald Reagan's inaugural address on January 20, 1981, was the opening shot in what became known as the Reagan Revolution: small government, low taxes, de-regulation, a belief that the markets know best. The revolution's spirit shone through the 2008 platform of the Republican Party, presented at its convention early in September.

"We do not support government bailouts of private institutions," it said. "Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all."

The final bell for that philosophy may have tolled on September 16, when the government nationalized the American International Group (AIG), the world's biggest insurance company, as part of a series of interventions to prop up the U.S. financial system and housing market at a cost, so far, of around $1 trillion to cure an American financial plague that is spreading to the rest of the world.

All contrary to the dogma of the Republicans who occupied the White House for 28 of the past 40 years. But in September, pragmatism trumped ideology and the world's leading capitalist country acted much like some of the European countries American free marketeers have often derided as "nanny states."

Irony of history: As the American crisis neared a crescendo, the European Union's economic and monetary affairs commissioner, Joaquin Almunia, warned that Europe should not employ "financial socialism" by bailing out failing companies. "Socialists like me, we are against financial socialism."

At the bottom of the U.S. crisis are deadbeat mortgages masquerading as sophisticated financial instruments, mortgage-backed securities, that were insured, in theory, by so-called credit default swaps. The assumption was that housing prices would continue to rise. Trouble started when the housing bubble burst.

"The paradox is that this whole mess was created by a bunch of zealots who believed in the laissez faire ideology of free markets unbound by proper rules, regulation and supervision," said Nouriel Roubini, an economics professor at New York University and head of RGE Monitor, an economic information service. Roubini sees the United States turning into "the USSRA, the United Socialist State Republic of America."

Those leading the effort to keep the U.S. financial system afloat, above all Treasury Secretary Hank Paulson and Federal Reserve chief Ben Bernanke, have studiously avoided the word "nationalization." (After all, this is an un-American concept, the sort of thing that happens in places like Venezuela, where Hugo Chavez nationalizes companies in the name of his 21st century socialism).

"Socialism, 21st century style," was the headline on a blog by Floyd Norris, the widely-read chief financial reporter of the New York Times. Others were more subdued. "Corporate welfare" was the term used by Columbia University professor Joseph Stiglitz, winner of the 2001 Nobel Prize in economics.

AMNESIA AND "NATION OF WHINERS"

The crisis, the worst since the Great Depression, has inflicted amnesia on some of Reagan's ideological heirs. They include John McCain [1], the Republican presidential candidate who supported de-regulation and endlessly proclaimed himself "a proud foot soldier in the Reagan revolution" when he courted the party base in the primary contest for the nomination.

McCain's initial reaction to the unfolding crisis was a call for the establishment of a commission to find out what led to the crisis, a classic Washington insider's response. He could have started by asking Phil Gramm, until recently his economic guru and once thought a leading contender for the post of Treasury Secretary if McCain won the election.

Gramm lost his position as economic advisor to the McCain election campaign after describing the United States as "a nation of whiners" suffering from "mental recession" - not the kind of remark likely to win votes from citizens grappling with financial hardship.

Gramm was the driving force behind the two pieces of legislation at the bottom of the crisis -- the repeal, in 1999, of the 1933 Glass-Steagall Act which had created a firewall between commercial and investment banking; and the Commodities Futures Modernization Act of 2000. The way the latter passed was extraordinary: 262 pages of dense language slipped into an 11,000-page omnibus bill on the Friday before the Christmas recess.

"The act freed complex derivatives from any regulation," said Michael Greenberger, who served in the Commodities and Futures Trading commission in the late 1990s. "It set the stage for the present mess and the problem is, no one knows how many of these instruments are still out there or who holds them."

Congress this week is scheduled to discuss an unprecedented $700 billion plan, submitted by the Bush administration, to use taxpayer money to buy up a mountain of bad debt. No one knows whether this will be enough and most Americans doubt that Washington leaders will be able to solve the crisis, according to a Zogby poll taken after the plan was announced.

The survey, of likely voters in November's elections, said 83% wanted those responsible for the practices that led to the crisis to be held criminally responsible.

That's not part of the plan.