Credit where it is due. In bailing out Bear Stearns’ troubled mortgage portfolio and encouraging J.P. Morgan Chase to buy the rest of the firm for next to nothing, the Fed prevented the mother of all Black Mondays from occurring on March 17, while punishing Bear’s management and stockholders for the company’s recklessness. Had the Fed failed to address Bear’s fate so promptly, panic selling would almost certainly have engulfed Lehman Brothers, Merrill Lynch, and other Wall Street firms.

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Ultimately, though, the Fed’s actions are likely to provide a respite from, rather than a resolution of, the credit crunch, and they point to the urgent need for more vigorous regulation and oversight of Wall Street. In rescuing Bear, the Fed went well beyond its original mandate of lender of last resort to commercial banks, such as Citigroup and Bank of America. The same day Bear was sold, the Fed also offered emergency financing directly to 20 Wall Street investment banks and agreed that the firms could provide as collateral “a broad range of investment-grade debt securities,’’ including mortgage paper nobody else wanted to buy.

To be sure, these are challenging times. But the Fed has embarked on a historic change. In extending its protective arm to all of Wall Street, it is evoking the threat of the Great Depression or even one of the 19th century’s epic financial whirlwinds. In 1825, the Bank of England, facing a wholesale panic in London’s financial district, flooded the markets with cash: “We lent it,” a spokesman commented at the time, “by every possible means consistent with the safety of the bank, and we were not, on some occasions, overnice.” Ben Bernanke wasn’t very nice to Bear’s stockholders either, prompting some of them to agitate for more cash from J.P. Morgan to approve the deal. But to everybody else on Wall Street, Bernanke seemed like the tooth fairy. From now on, he was effectively saying, no Wall Street firm is dumb or venal enough to be allowed to fail.

Bernanke and many other economists believe the Fed’s failure to bail out stricken banks between 1929 and 1932 was one of the main reasons the Depression lasted so long. In 1932, Herbert Hoover established the Reconstruction Finance Corp., which lent to banks, railroads, and other troubled businesses but failed to reverse the string of bank failures. By the start of 1933, when Franklin Delano Roosevelt entered the White House, thousands of banks had gone under and many more were facing potential runs on their deposits. F.D.R. declared a bank holiday. When the banks reopened, the Fed had broader power to bail out those that were struggling. A few months later, the Glass-Steagall Act established a system of federal deposit insurance, removing the threat to depositors of seeing their savings wiped out. Stability returned to the banking system.

Roosevelt saved capitalism from itself; as a quid pro quo, he insisted on much tighter regulation. Under another Glass-Steagall provision, investment banks and commercial banks were split apart, with the latter being prohibited from underwriting many types of risky securities. Tighter capital requirements were also introduced for commercial banks, along with limits on how much credit they could extend to consumers and real estate developers. To police Wall Street and prevent a repeat of the chicanery that marred the 1920s, Roosevelt founded the Securities and Exchange Commission.

The current situation is crying out for another Roosevelt, or at the very least, another Hoover. (The 31st president is often misread as a conservative ideologue, but in addition to founding the R.F.C., he raised the tax rate on high earners from 25 to 63 percent.) Great care will need to be taken in crafting a 21st century New Deal for Wall Street, but the broad outlines are clear.

If Wall Street executives are going to call on the Fed every time they trash a firm, the government needs to impose some speed bumps in the form of mandatory capital requirements. During the past couple of decades, investment banks like Goldman Sachs, Morgan Stanley, and Bear Stearns have turned themselves into neo-hedge funds, with vast proprietary trading desks that employ enormous leverage. Bear’s top managers, who saw themselves as riverboat gamblers, loaded the firm with a debt-to-capital ratio of 30 to 1. When a financial institution has this much debt, even a three or four percentage-point fall in the value of its assets can prove fatal.

Last summer, after Bear got into trouble, the company failed to raise more capital for an essentially selfish reason: An influx of capital would have diluted the shares of existing stockholders, including those of senior management, and reduced the firm’s return on equity. Companies in such straits shouldn’t be given a choice. If bonuses and rentals in the Hamptons are a bit more humble than they otherwise would have been, so be it.

Other options worth pursuing include varying capital requirements throughout the economic cycle—making sure that firms build up reserves during good times—and forcing investment banks to keep a bigger percentage of their holdings in liquid assets. (It was a liquidity crisis that did Bear in.)

While the regulators are at it, they should also impose minimum capital requirements on big hedge funds, such as D.E. Shaw, Renaissance Technologies, and Citadel (which, incidentally, was mentioned as a possible purchaser of Bear Stearns). Such unregulated and opaque firms are now among the biggest players in the market, and the collapse of one of them would cause almost as much grief as the demise of Bear or Lehman Brothers.

More transparency is needed. Until Merrill Lynch set out the details of its mortgage investments in October, there was no way for financial analysts, let alone ordinary investors, to tell how much of its trillion-dollar balance sheet was devoted to complex collateralized debt obligations. (More than $30 billion is the answer.) And how many Citigroup stockholders knew the firm had been on the hook for $83 billion worth of investments made by off-balance-sheet vehicles affiliated with the company?

The regulatory agencies also need to be modernized. At the moment, the Fed oversees financial supermarkets like Citi, the Comptroller of the Currency looks after other big commercial banks, the S.E.C. oversees Wall Street firms, and a variety of federal and state regulators handle local banks, thrifts, insurance companies, mortgage lenders, and other financial institutions. Since financial firms of all kinds have been merging at a dizzying rate, it only makes sense to consolidate the regulators too.

Barney Frank, the chairman of the House Financial Services Committee, has proposed setting up a new “superregulator” to monitor economy-wide risk, a plan seconded by Barack Obama in his recent speech at New York’s Cooper Union. Britain, among other countries, has already moved toward establishing a single financial regulator, though disputes between the Financial Services Authority, the Bank of England, and the Treasury are still a problem. Ending the turf wars isn’t a practical option, but that shouldn’t be an excuse for sticking with the status quo.

Then there is the central and controversial issue of how to pay people who work for financial firms. In blowup after blowup, compensation schemes based on short-term performance have encouraged traders, division heads, and C.E.O.’s to act recklessly. In the typical case, a trader or executive places a bet that pays off immediately—or soon enough to increase the individual’s bonus or stock-options value—but exposes the firm to long-term dangers. Examples include Merrill’s decision to step up its production of mortgage securities just as the outlook for the real estate market darkened and Bear’s refusal to keep an adequate reserve of cash on hand. Earlier this year, Raghuram Rajan, a former chief economist at the International Monetary Fund, referred to such behavior as “creating fake alpha—appearing to create excess returns but in fact taking on hidden risks.” When many people at different firms are doing the same thing, a ruinous boom-and-bust cycle results. One way to force traders and senior executives to take a more long-term view would be to pay them largely in stock or stock options that don’t vest for five or 10 years.

First and foremost, the executive and legislative branches need to repudiate the hands-off philosophy that free-market evangelists like Alan Greenspan and Wall Street lobbyists have been pushing for decades. The financial industry isn’t like the sporting-goods or music business. When lenders extend mortgages to home buyers who haven’t shown proof of income, or when commercial banks invest in risky securities, or when investment banks gear up their leverage ratios to 20 or 30 to 1, their decisions affect the entire economy. Common sense dictates vigilant oversight.

Until recently, few politicians and none of the presidential candidates were adequately addressing this issue. From Republicans, cozying up to Wall Street is to be expected, but Hillary Clinton and Obama had also been going easy on the traders. (Recall Clinton’s wobbling over whether earnings from private equity deals should be taxed at the regular rate.)

Doubtless, hefty campaign contributions from the financial industry had something to do with the candidates’ reticence. But now the economic circumstances have changed, and so has the political calculus. The country is in a recession (or near recession) that’s stamped made on wall street, and voters are furious about Stan O’Neal, Chuck Prince, and other bigwigs walking away from financial disasters with their pockets stuffed. In this febrile environment, the populist appeal of attacking Wall Street outweighs the financial benefit of acting as its protector. Hence Obama’s proposals for a thorough regulatory overhaul and Clinton’s call for troubled mortgage holders to receive a Bear Stearns-stye bailout. (Even Treasury Secretary Hank Paulson, the former head of Goldman Sachs, has advocated beefing up the oversight of investment banks.) The financial industry’s lobbying power should never be underestimated. But the great Wall Street free-for-all might finally be at an end.