Friday, October 10, 2008 may go down in history as the day that free-market ideology (at least as it's practiced by the current powers-that-be) officially died.

Treasury Secretary Henry Paulson announced late Friday that the $700 billion bailout plan will now include injections of capital directly into troubled financial institutions, an idea he flatly rejected when he was selling the Treasury's plan to Congress just weeks ago.

"Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure," Paulson told the Senate Banking Committee on Sept. 23. “This is about success.”

So, does this mean we have failure? Well, yes. Admitting it is a good first step.

The Bush administration's new plan of attack came as international finance ministers met to discuss global solutions to the economic crisis that's hitting nearly every corner of the globe. Early on Monday, the United Kingdom is expected to announce plans to inject capital as much as $60 billion into four large banks, Royal Bank of Scotland Group, Barclays, HBOS, and Lloyds. Other European nations announced plans for similar measures.

(Update: Britain pumped $64 billion into just three of the banks. Barclays announced plans to raise capital without government help.)

Here in the U.S., many economists welcomed the about-face from the Bush administration on how to spend the $700 billion. But the plan to buy up illiquid mortgage-backed assets from banks hasn't been abandoned. Exactly how much of the money will go towards equity stakes and how much will be used to buy assets isn't clear.

One avenue that Treasury seems to be taking is to use Fannie Mae and Freddie Mac to buy more of the mortgage –backed bonds as they are authorized to do. The government agreed to finance the two mortgage giants with as much as $200 billion, in a separate authorization from the $700 billion package approved by Congress.

Buying equity stakes in troubled banks may be frowned upon by free market ideologues, but it will certainly be easier and faster than buying all the toxic assets weighing down bank balance sheets. According to the New York Times, Federal Reserve chairman Ben Bernanke advocated this plan of action early in the talks but it was rejected by Republican policymakers.

Banking executives also welcomed the news that the government  would be willing to buy non-voting stock to help shore up liquidity and potentially allow them to resume lending.

It also provides relief that the market will not have to endure another Lehman failure. Morgan Stanley is furiously working to close a deal to raise $9 billion from a Japanese bank that's been hobbled by its dramatic fall in value during the past two weeks. Even if the deal falls through, the U.S. government would likely step in with part of that $700 billion. (Update: Mitsubishi and Morgan Stanley agreed to revised terms of the deal Monday morning.)

Paulson expects to make the first capital injection within the next two weeks. The market may wish it comes in the next two days.