“THIS TOO SHALL PASS,” King Solomon’s advisers told him to engrave on a ring, and refer to it whenever he felt depressed. Or so the legend goes. Not a bad idea for bankers beset by still more dodgy paper to write off, for shareholders at loss-making Lehman Bros. and ailing Morgan Stanley (first quarter earnings down 58 percent year-on-year), and for homeowners as they watch the equity in their homes evaporate, or disappear. Some of our current crises will indeed pass.

But it would be a mistake to believe that once the current crises are over, the world will be as it once was. It won’t. For one thing, the entire system of regulation to which investment banks are subjected will be different. Ever since the Great Depression governments have recognized that large commercial banks cannot be allowed to fail, and that depositors had to be protected by insurance when banks did fail. But no one imagined that investment banks are too interconnected to be allowed to fail–that the risks to the financial system of a failure by an investment bank are every bit as great as the risks posed by a failing commercial bank. Bear Stearns put paid to the notion that if a big investment bank fails the next day will be just another day at the office for those who trade with it. So the Federal Reserve Board worked with the U.S. Treasury to bail out Bear Stearns (paying $10 per share for stock in a company headed to bankruptcy sounds like a bailout to me), or at least prevent it from going bankrupt. Take the government’s guarantee against failure, and you are the government’s man: Be too big or too interconnected to fail, and the government will regulate how you do business. Treasury secretary Hank Paulson made that clear last week when he told an audience of Women in Housing and Finance–or those who remained awake in spite of his, er, dry delivery style–that some firms are indeed too big or interconnected to be allowed to fail, and that “We must … define the scope of the Fed’s role in identifying and constraining risk-taking that can detrimentally affect the financial system.” In ordinary language, that means more regulation–and this from a former Goldman Sachs boss who is keenly aware of the moral hazard created by current Fed bailout policy.