A Professor and a Banker Bury Old Dogma on Markets

For the last year, as the nation's economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben S. Bernanke, had been warning Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention.

A longtime student of the Great Depression, Mr. Bernanke was acutely aware of what could happen without a decisive move. Finally, the moment that called for action arrived late Wednesday. Less than 24 hours after the Fed bailed out American International Group, the giant insurer, it was clear the turmoil gripping Wall Street was only growing worse and that ad hoc solutions were not working.

Talking into a speaker phone from his ornate office, Mr. Bernanke told Mr. Paulson that it was time to adopt a comprehensive strategy that Congress would have to approve. Mr. Paulson understood. Reluctant in recent days to send Congress a plan that lawmakers had warned had little chance of quick passage, he had worried that a rejection would only further shock the markets. But during two conference calls Wednesday night and Thursday morning, he agreed that they had no choice.

"It just happened dramatically," Mr. Paulson said in an interview on Friday. "There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious."

Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government's largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington's role in the marketplace for years.