Dwight Eisenhower, on the eve of relinquishing the presidency to an inspiring young leader from the Democratic Party, warned the American citizenry against the excessive influence on government policy by what he famously referred to as “the military industrial complex.” Nearly half a century later, another inspiring young Democratic president has taken over the presidency amidst another controversy, this time surrounding what some might well borrow Eisenhower’s words to describe as “the disastrous rise of misplaced power” by a particular group of powerful interests.

But in 2009, the fear isn’t that military leaders and arms manufacturers will take over the policymaking process in Washington. Rather, it’s that Wall Street and Washington have become all too cozy for comfort, thanks in large part to the revolving door through which investment bankers and regulators pass on a regular basis. Just look at the Federal Reserve Bank of New York, whose massive fortress-like building in lower Manhattan is only a few blocks from Wall Street itself and which, to its critics, looks more like a branch office of any investment bank. At its head is William Dudley (ex-Goldman Sachs); its staff includes former employees from most of Wall Street’s other top firms, including Michael Alix, formerly senior risk manager at Bear Stearns and now senior vice president of the New York Fed’s ban supervision group. (Let’s leave aside for another day the issue of whether anyone who oversaw risk management at Bear Stearns in its final days is qualified to help identify looming problems on the balance sheets of other institutions.) Dozens of the young analysts toiling away in the bowels of the New York Fed and earning a fraction of what they could pocket even today at Goldman Sachs or Morgan Stanley are just waiting for better times to make the leap to the private sector. Meanwhile, those firms—hyper-aware that the government in the shape of agencies like the Fed will be playing a much greater role in their day-to-day activities in the months and years to come—will be eager to recruit insiders who can help them decipher the regulators’ mind-sets and perhaps wield a greater influence on policy decisions.

The New York Fed is just tip of the iceberg. Government departments and agencies of all stripes have been seeking out a growing number of people with Wall Street backgrounds to help design and enforce new rules and programs. And that revolving door has attracted a lot of flak in recent months, particularly from those looking for confirmation that "Government Sachs" has been able to tilt the playing field in its favor by placing alumni in key positions in a host of government departments and regulatory agencies. One move after another—such as the decision of Timothy Geithner (former New York Fed head, now Treasury Secretary) to hire a Goldman Sachs lobbyist as his chief of staff—has aroused suspicion and criticism.

But let’s be honest with ourselves. In the aftermath of the financial crisis, we claim that we want the most effective regulation possible. We want people at the SEC, the Fed, the Office of the Comptroller of Currency, the Treasury, and other agencies that are able to spot bubbles in the making, identify actual or potential market abuses, and devise policies that ensure the markets work efficiently. Is it realistic to think we can achieve that without a steady stream of former Wall Street denizens passing through this revolving door? Do we really want a lot of government agencies run by well-meaning and very bright public servants who have never worked within the belly of the Wall Street beast and who therefore don’t know from experience the ways that a financial institution can try and outwit regulators?

Perhaps the best guardian for the henhouse really is a reformed fox. “Regulators are responsible for making sure the system doesn’t break down, and how can they do that if they don’t understand—preferably firsthand—how that system works?” demands Ed Grebeck, chief executive officer of consulting firm Tempus Advisors, who also lectures on credit default swaps at New York University. There’s no doubt that in the run-up to the subprime meltdown and the subsequent credit crunch, many regulatory agencies dropped the ball. “If the folks in Washington had had more people who understood the ways credit default swaps were being used or the risks posed by CDOs—or even just how new products are created on Wall Street—perhaps the credit bubble wouldn’t have reached such extreme levels.”

Well, maybe—or maybe not, since some of Wall Street’s most wide-awake regulators (think of Sheila Bair or even the CFTC’s Brooksley Born, who made a doomed attempt to oversee the derivatives market) weren’t given the support or resources they needed to do their jobs in the years leading up to the market meltdown. In the aftermath of the crisis, however, that seems likely to change. Now those regulatory bodies will face a different kind of challenge. They’ll need to keep tabs on Wall Street’s frenetic innovation and endless dealmaking and try to identify tiny clues to everything from the mundane (insider trading and other kinds of malfeasance) to the extraordinary (the next source of outsize systemic risk.)

There’s a lot of hand-wringing about Goldman Sachs “cronyism” these days. Imagine, however, what might have happened if Paulson hadn’t had a conversation with former Goldman banker (now a buyout manager) Christopher Flowers at the New York Fed in the summer of 2008? It was Flowers who asked Paulson if the latter had been keeping tabs on what was happening at AIG. He hadn’t; it wasn’t until Flowers showed Paulson the giant—and still growing—hole in AIG’s balance sheet that the Treasury Secretary realized what was afoot. Perhaps bringing more Wall Street insiders onboard—and training them to put the health of the system first—will mean that if there’s another AIG-style debacle taking shape, Geithner and his successors will learn about it from their own staff early on, rather than relying on an outsider to bring it to their attention in a conversational aside so late in the game.