The free market—or, more aptly, free market thought—finds itself, once again, on the defense. Popular judgment, abetted by politicians and pundits, has placed the blame for the current economic crisis squarely on faulty or missing financial regulation. Alan Greenspan’s mea culpa last month on this point has rendered uncertain the once-bulletproof legacy of the former Fed Chairman and champion of the laissez-faire. Libertarianism—that geek-utopian heir to classical, Adam Smith liberalism—has been written off as persisting today in a flailing, extended stonewalling upon its deathbed. For opponents of the bailout, “socialism in America” is the rallying cry, the wounded death-wail at their congressmen for so mindlessly submitting to private benefit funded by public loss.

But this is not 1950, and redbaiting carries little of the fear-stoking currency that it once did. The McCain campaign’s swan song, decrying Sen. Obama’s supposed socialism—that four percentage-point difference between the candidates’ proposed income tax rates for the highest tax bracket—won him few points, even among party rank-and-file. No, the ideological tents to be pitched post-Lehman are of a much richer nature, pitting far-reaching and heretofore uncontested manners of thinking against one another in forging what will need to be a decidedly twenty-first century conception of money, credit, and regulation. Today’s grand dance of ideas in spheres public, private, and academic will influence profoundly the shape of the international recovery and the preventative measures to come.

Ideas—the theory that guides them, the assumptions that undergird them, the structures that animate and enact them—bear special significance in the present financial crisis because the crisis was engendered uniquely by a failure of ideas, not extrinsic shocks like a contraction in oil supply or the default of a particular country. Consider it: the bubble in housing propagated by lax lending practices and sustained easy borrowing suddenly pops. Newfangled derivative instruments—which offer cheap institutional funding that evades certain capital requirements—provide the inlet for mortgage defaults and bankrupted mortgage lenders to infect the broader financial system, destabilizing the web of leverage and hedging that sustained many institutions on the fringes of the regulatory regime. Fannie and Freddie. Countrywide. Confidence in large lenders is lacerated, and credit markets ranging from the esoteric to the pedestrian collapse. Money cannot get around, and so the money-movers wither. Bear Stearns. IndyMac. Lehman.

The players in this drama of numbers personify the big ideas of the money-complex as it has existed since at least the mid-1980s: the relative stability of the United States as an investment choice, coupled with Asian central banks being suddenly flush with capital from their own growth, allows American consumers and investors to spend wantonly on the savings of the rest of the world. Moderation and price stability provide fertile conditions for the rapid extension of credit, which further enables rapid yet sustainable economic expansion. Leverage—the reinvestment of borrowed money—enhances financial institutions’ ability to provide values services to their clients. Risk is something to be managed with infinitesimal precision, through the buying and selling of tricky things called derivatives. The bailout further augments this foggy vocabulary: some assets are toxic. When nobody will lend, the government will lend to the lenders.

There is something about this new way, which has only become visible in full, violent nudity during the unraveling of the past eighteen months, that rankles the lumbering ideological machinery buried in our national DNA, something that calls into question what it means in particular to operate an American economy. In America, a free, competitive market always equilibrates toward efficient outcomes. In America, enterprise—the stripe, for instance, that concocted the complex financial instruments that entangled subprime mortgage borrower, Wall Street, and Main Street—is supposed to be rewarded. Greed is good, maybe, sometimes. Trickle-down economics does/does not work. In 2008, we are stirred out of apathy by the greasy splashback that our cherished ideals release when they detonate.

The bailout, in some form, was always bound to happen. Despite the failure of the first congressional vote, there was never really, truly, any choice in the matter. Immediate resuscitation of the financial system was entirely essential for the continued day-to-day functioning of major business. What thought can there be of moral hazard—of encouraging and rewarding heedless heart attacks in the future—when a doctor chooses to defibrilate a patient in cardiac arrest?

More relevant now is how our understanding of recent events ought inform our broader understanding of financial markets for the future. The kind of market fundamentalism that sustains a stubborn conviction in the politeness of free market outcomes is clearly untenable. What has been known and felt—if not properly and robustly expressed in existing regulation—is that markets do not, left to their own devices, behave well. Bubbles arise—cancerously, foolishly—in markets of all kinds: tulip markets, stock markets, beanie baby markets, real estate markets, credit markets. Equilibria may be distorted by human factors, shrouded in mists of bad information, or simply unavailable given certain structural features of the market.

How should regulators cope? The Federal Reserve’s primary function has always been countercyclical: to take away the punchbowl when the party gets too rowdy and to dole it out when the party lulls; to make borrowing expensive when inflation threatens and encourage borrowing when growth is weak. But it is apparent now that the party is infinitely more complicated, and the partygoers far less sensitive to punch, than previously imagined. Regulating derivatives and the new ways in which banks manage risk have not been decisive variables in the Fed’s toolkit for equilibrium maintenance. Alan Greenspan’s view during his tenure that these synthetic instruments represented benign ways for institutions to allocate risk and reduce disequilibrating frictions seems myopically doctrinaire in the confusion and dashed hopes left by the disintegration of these markets.

But Mr. Greenspan ought not bear the entire burden for the regulatory hiccoughs that precipitated the crisis. It was prolonged depression of longer-term interest rates—those market rates that determine mortgage payments and building contracts and which the Fed has not historically manipulated—that helped sustain the run-up in housing prices. And the Greenspan Fed’s experience with the dot-com bubble in the late ‘90s was largely a vindication of Greenspan’s hands-off approach to bubbles; in choosing to let the bubble destruct on its own and clean up the mess afterward rather than pop it preemptively, Greenspan got a fairly contained recession in 2001 and averted the legacy of being the grumpy monetary traditionalist who stymied the march of Internet technology.

Still, a twenty-first century regulatory system would undertake its countercyclical mandate not just by regulating the money supply, but also by monitoring and evaluating credit conditions, a task made terrifically complex by the financial engineering that has been aimed largely at cloaking the lending environment from regulators’ watch. The Austrian conception of cyclical boom and bust is exploded in a million new dimensions. It may even become within the Fed’s explicit purview to contain and manage asset bubbles, the kind of market phenomenon that occurs orthogonal to a purely two-dimensional conception of the business cycle.

But perhaps touchiest of the various ideas at stake is the social justice of the bailout and crisis. The apparent inequity of using taxpayer resources to cushion the masters of the universe as they fall from the firmament stains the bailout’s crucial function of restoring confidence in the financial system. And while the free market has always been capable of producing outcomes that do not comport with social justice, the ties that have fastened moneymen to a certain debased morality in the public imagination since the 1980s should not be so strong as to convince taxpayers that a Pyrrhic moral victory enacted over greedy Wall St. good-for-nothings is in their best interests.

And thus the reconstructed financial order needs to illuminate and enforce the vast good brought about by liquid capital markets—growth, entrepreneurship, stability—while restraining the baser impulses that motivate heady risk-taking divined away by mathematical obfuscation. A system that allows market participants to gorge in anticipation of a government rescue to pull it from its own wreckage is obviously unsuitable. Less obvious is the precise way in which this race toward the breaking point is to be disincentivized. For all the bluntest tools in the next policymakers’ belt—tightened leverage and credit requirements, new standards for rating agencies, careful control of derivatives—financial engineers and clever traders have and will always work to sneak out extra profit between the lines of capital and margin requirements. They’re paid too well not to.

This final point speaks, interestingly, to one last big idea. The primacy of something like the human condition—fatal, eternal, and rough with tragedy—in understanding and designing financial markets endures and should offer further lessons to the next world-builders. What may be most difficult for laboratory libertarians to surrender of their smoldering dogma is the concept of the financial actor as machine-like, perfectly informed, spotlessly rational Homo economicus. Certain elements of human nature will never be ironed out of market operation, and in order for the reconstituted financial order to retain the creativity and innovation that has allowed the financial industry to hugely expand global economic possibility, the failures of coordination of which bubbles, fads, crazes, and market manias are all symptomatic must be acknowledged not as random deviations from normal market behavior, but rather as intrinsic to it.