The U.S. government is fast becoming a socialist institution, owning the commanding heights of the economy. It has taken over responsibility for Freddie Mac and Fannie Mae. It is now sitting on 80 percent of the shares of American International Group, the insurance giant, in return for an $85 billion loan. It is poised to lend another $25 billion to the troubled U.S. auto industry.

It has extended, through the Federal Reserve central bank, a series of open-ended lifelines to those parts of the financial system that it deems too big to be allowed to fail. It has also, by declining to intervene or by a heavy-handed role in negotiations, forced the liquidation of Bear Stearns and Lehman Brothers. It did not create the situation in which Merrill Lynch had to sell itself to Bank of America, but it sealed Merrill's fate by declining to propose any other option.

Only two investment banking giants survive -- Goldman Sachs and Morgan Stanley -- and Stanley's fire-sale purchase of Bear Stearns earlier this year was orchestrated by the man who has become the most consequential federal official of them all, U.S. Treasury Secretary Hank Paulson. Himself a Goldman Sachs veteran, Paulson has become the American Lenin, the man who has seized what the first Soviet leader called "the commanding heights" of the economy.

Of course, Paulson probably had little choice in the matter. When it comes down to survival of the financial system, only the state has the authority and the financial muscle to stand as the solution of last resort. But it is ironic that in the crisis of capitalism, the capitalists had to turn to the solution of state ownership.

But there is a further problem here. Paulson has always demanded, in the name of moral hazard, that a price be paid for the state's rescue, and that price has always been paid by the shareholders. In the case of Bear Stearns, they were very nearly wiped out. In the case of Fannie Mae and Freddie Mac, the bondholders have seen their capital secured, but the shareholders are paying the supreme price. In the case of AIG, by taking over 80 percent of the shares, the federal government has destroyed four-fifths of what they thought was their capital.

Fair enough, one might say. Somebody has to pay, and if the shareholders have enjoyed the good times, they should pay the piper in the bad times. And if shareholders in strategic financial institutions are to be made good by the taxpayer every time their companies get into trouble, that is an end to moral hazard and an end to the real cost of risk. It would never do for losses to be billed to the public while profits remain private.

But there is a different kind of price to be paid: the price of precedent. Shareholders have now been put on warning that they will bear the brunt of losses. And in such a case, who would want to be a shareholder?

Put it another way: The accumulated write-offs of the world's leading banks as a result of the subprime mortgage crisis were $500 billion even before the dramatic events of the weekend. Banks so far have managed to raise just over half of that in new capital. Most estimates reckon there could be another $500 billion in new write-offs to come as a result of new mortgage losses, plus the rising defaults on credit cards and car loans.

So who will provide the banks' new capital needs, which look to be somewhere between $200 billion and $700 billion? Given Paulson's rule of wiping out the shareholders first, who would want to be a shareholder? And if the banks cannot raise capital from shareholders, they will have to borrow -- and in such circumstances, who would lend? And at what price? How high would the interest rate have to be?

In theory, there are potential buyers. The Abu Dhabi Investment Authority alone has some $800 billion. The Chinese central government commands more than $2 trillion. Japan's postal bank sits on $1.5 trillion, and Japanese household assets total more than $15 trillion. They could each or all together easily afford to buy the entire U.S. financial sector, but not at the price of becoming shareholders under Paulson's new rules, even if the U.S. Congress were to tolerate the American financial system coming under foreign ownership.

But if private finance in the form of shareholders and lenders is unlikely to come to the rescue of U.S. financial institutions, the public sector will have to do so. It seems a safe bet there will be further banking troubles. The regional banks that held Fannie Mae and Freddie Mac shares would appear to be most at risk. Even if the Fed and the U.S. Treasury do not come to their rescue, the U.S. taxpayer will still be on the hook through the federal deposit guarantees.

If there is any silver lining to this crisis, beyond the sobering lesson that the world has learned about the fallibility of bankers and the dangers of loose lending, it may be that U.S. taxpayers one day will see a healthy return on the investment now being made, just as they did on the loans extended to Chrysler 30 years ago. But maybe the Fed and the Treasury will prove to be not very good at banking, in which case America's Lenin will have soaked the long-suffering taxpayer all over again, and the liabilities of the American state will soar beyond $10 trillion.

Who knows? But as Sens. John McCain and Barack Obama grapple for the presidency, their putative powers would seem to pale beside the authority and the consequences of the man who really runs the country, America's Lenin, Hank Paulson.

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