After yesterday's debacle on Wall Street, everyone now wonders where we are headed.

Some say the Federal Government needs to step in, at least to prevent insurance giant AIG from going under...

If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow.

Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed.

But Larry Kudlow says the Treasury Secretary is doing the right thing by allowing the market to work.

Paulson’s view — supported by Bernanke and former Clinton Treasury official Timothy Geithner (now the president of the New York Fed) — is that the private sector has to take responsibility, including a consortium of private bank funds to assist the beleaguered AIG insurance company. We are now in for some Schumpeterian gales of creative destruction. But this is how it must be.

“Moral hazard,” said Paulson, “is something I don’t take lightly.” He’s saying bad financial behavior must be penalized, not rewarded. That’s the essence of the issue. The risk of failure is essential to an efficient economic system, and that includes financial risk.

In our capitalist system there are losers as well as winners. There are failures as well as successes. Harking back to the eminent economist Joseph Schumpeter, the old failures will be replaced by new enterprises.

The alternative, of course, is that the U.S. goes down the old European path of government domination of markets and the economy. But the moment the U.S. becomes bailout nation, that is the moment our economy and country heads irrevocably down the road of decline. However, Paulson set down a marker and said, “No we won’t.” As difficult as the next days may be, the primacy of economic freedom has been given a boost while the economic future of the U.S. looks brighter. Paulson’s decision was both momentous and transformative.

Kenneth Rogoff, who teaches economics at Harvard, agrees...

Letting a big investment bank go, as the Fed and Treasury did this weekend, was a calculated risk in a difficult situation. And the risks are very real. With the immense interconnectivity of the financial system, there really is no telling where the unprecedented failure of a big investment bank might lead. On the other hand, ponying up tens of billions in tax money, as the Federal Reserve did in March when another investment bank, Bear Stearns, collapsed, is no answer, either. With the housing market still weakening, with U.S. exports likely to suffer as the global economy falters and with unemployment rising, it is clear that simply bailing out Lehman Brothers would not stop the rot in the financial system.

I tend to support the view that the Federal Government should let the correction happen, but I haven't a clue as to how far they should let it go. Of course, I am not an economist or any kind of financial expert. My fear is that those who are economists or financial expert are just as clueless as I am.

I know a little more about politics (I even have a degree), and what I know (or think I know) tells me that the Presidential race continues to be tight, and it is all about how John McCain stole the mantle of change from Barack Obama, starting with the Sarah Palin pick. Democratic consultant Joe Trippi has it exactly right...

It's not just Palin.

The brilliance of the McCain strategy and messaging is that it includes a trap for Obama. To push back on the McCain claim of "country first" and "the original mavericks who will shake up Washington" the Obama campaign's attack of "four more years of George Bush" becomes a problem. In a country that yearns for post-partisan change the Obama campaign risks sounding too partisan and like more of the same.

It would not surprise me if in one of the debates Obama or Biden uses the "You voted with George Bush and supported him 93% of the time" and its John McCain that retorts "that's the kind of partisan attack the American people are sick of....".

What worked for Obama is now working for McCain. The important lesson for the Obama campaign is that the Clinton campaign kept looking at its research, kept stressing experience and did not adjust until it was too late. The McCain campaign has not only adjusted to the Obama message, they have changed the terrain.

Now the Obama campaign and its allies need to understand that in arguing that John McCain represents a third term of George Bush and the GOP agenda it is the Obama campaign that risks sounding partisan in a country that yearns for the post-partisanship of "country first" and "shaking things up in Washington".

Bingo.