Key Points:

Relief is in sight for the United States' financial system. The federal Treasury proposes to buy all the bad loans on Wall St at a cost to the American taxpayer of probably $1 trillion. Whoever said "big government" was not a good thing? George W. Bush for one. John Key for another; "less government" is part of the National Party's mantra. But when markets fail, government is the only solution.

A rescue, though, is not a solution to anything except the fear of the financial system's collapse. The conditions that brought the banking system to this point will not be changed by the plan proposed by US Treasury Secretary Henry Paulson, who ran the Wall St investment bank Goldman Sachs until the year before last. If he can convince the Democrat-controlled Congress to go along with the plan, it might prevent institutions falling like dominoes but it could leave them capable of creating the same unsustainable bubbles again.

In fact, a bailout of this magnitude can only reinforce speculative behaviour. Next time money traders find themselves caught up in a game of pass-the-parcel with high returns, they can play with even more confidence that when the music stops the Government will accept the parcel.

Next time the bubble might not involve the same sort of debt instruments and derivatives that drove the frenzy in recent years, but it will be substantially the same behaviour. Some call it greed but it is not that simple. Financial institutions have to make competitive returns to stay in business. They would probably welcome a system of regulation that checked the security of their products.

Good government lies in the quality of market regulation. The rules need to neutralise political influence on investment decisions in the economy but ensure that investments are directed to goods and services of measurable value. Financial derivatives, hedge funds and futures have roles to play in giving investment signals about products in the real economy, but when financial products are traded for themselves, closer scrutiny is clearly needed.

Devising sensible regulation of the financial sector will be a much tougher task of government than the Bush Administration's rescue plan. That simply requires expanding the national debt, a painless operation as far as taxpayers can see. The pain will be disbursed in domestic interest rates, higher costs and lower economic growth in the future.

Those are problems for the next US Administration. Mr Bush and Mr Paulson have time to do nothing more than try to push the rescue plan through Congress before it rises at the end of this week for the elections due on November 4. In the few days, remaining congressional Democrats are trying to insert their preferred rescue techniques into the package: US$50 billion ($73 billion) in public works, higher unemployment benefits, relief for home-owners facing bankruptcy and bailiffs.

The chairman of the House financial services committee would also like caps on the pay of those at the banks that are unloading bad debt on to taxpayers. That would be a popular move. It hurts to hear that staff at Lehman Brothers are to share a US$2.5 billion bonus pool set aside before the bank filed for bankruptcy last week.

At times like this everyone is grateful for government, which can do wonders with the power of taxation and the sovereign right to create money. Modern government learned in the 1930s that it can, and must, prevent a financial crisis from crippling the real economy. But government needs to be careful not to kill markets with kindness. Save the innocent by all means, but those who played fast and loose with funds entrusted to them ought to lose something. This bailout looks too soft.