Panic on Wall Street — and in every foreign financial market — was supposed to be calmed by the Bush/Paulson $700 billion bailout of the financial industry. Confidence among investors and bankers would be restored, we were told, if only this huge chunk of our free market were nationalized.

That was two weeks ago, and over the principled objections we and many House conservatives (and a few in the Senate) posed, the bailout passed.

Secretary Paulson appointed a gent fortuitously named Kashkari to restore the credit market, though his name is inconsistent with the job he has undertaken. Then a wave of horror washed over Secretary Paulson and the President who — for the first time, apparently — realized that the bill Congress enacted wouldn’t result in anything actually being done until the massive bureaucracy implemented this huge and immensely complex program.

Wall Street, of course, realized this the minute the bailout passed, and followed it with a slow slide into further losses. And then came last week, when the markets gave the Bush/Paulson plan a massive “no confidence” vote. Panic was the rule, and the actions of the government have so far had no effect whatever in calming the markets and increasing investors’ confidence. At closing Friday, the Dow Jones Industrial Average had lost about 2,400 points in the course of eight days.

In yet another round of emergency sessions this weekend — this time, including the G-7 finance ministers here for International Monetary Fund meetings — President Bush said, “All of us recognize that this is a serious global crisis, and therefore requires a serious global response, for the good of our people.”

There was consensus on general principles of action by the G-7, but nothing concrete was accomplished or even agreed upon. Such general principles do not a recovery make. Nor does further nationalization of our economic engines.

Secretary Paulson — who may be mistaken for a descendant of Napoleon Bonaparte, not Werner von Braun — announced that the $700 billion bailout was going to be set aside for the moment and that he would use some of that money to inject capital directly into troubled banks, buying interests in them and effectively nationalizing them.

So we’ve got a $700 billion trial balloon leaking badly, and another idea costing we know not how much, following hard upon it.

Secretary Paulson apparently has no clue about what will work, and will answer one apparent failure with another experiment. The only common factor we can observe here is that whatever he does, it aggregates power over our economy to the Treasury Secretary.

Before America can restore confidence in the markets, we have to have confidence in the people who are leading our administration. And that is sorely lacking.

The Bush administration, with Hank Paulson in the lead, has bailed out Bear Stearns for about $100 billion, demanded and received the $700 billion bailout authority, then let Lehman Brothers go bankrupt and is now planning to inject an unknown amount into banks directly. The Federal Reserve, about three weeks ago, pumped $630 billion into the credit market, without noticeable effect on the crisis.

To be fair, it’s impossible to know how deep the crisis is, and consequently impossible for the Treasury Department and the White House to devise a precise solution.

All the focus on the sub-prime mortgages and the mortgage-backed securities based on them — both seriously devalued by the depressed housing market — has diverted attention from the so-called “credit-default swaps”. They are the low-density cholesterol clogging the financial arteries.

A credit-default swap is a contract between two parties regarding the eventual maturity (payoff) of a bond. One side buys “protection” — he can sleep at night that he will be paid. The other side (seller) accepts the payment to guarantee that sleep. The contract itself can be traded back and forth (different folks get involved as eventual recipient or guarantor of “protection”) and for more or less money as the value of the bond fluctuates. (Only recently has there been an effort to centrally clear (settle) the swaps.)

According to the Wall Street Journal, “…the government’s takeover of mortgage companies Fannie Mae and Freddie Mac on Sept. 7 triggered payouts on swaps tied to as much as $1 trillion in debt…” There may be as much as $50-60 trillion of them in the market right now, making that much of the financial market illiquid.

The current Gross Domestic Product of the United States is about $15 trillion. If there are $60 trillion in CDS out there, they represent four years of economic life of the United States. But they aren’t all held here: many European and other banks have them. No one knows how much is where, or what they are worth.

Bouncing from bailout to payout, the Bush administration has only diminished confidence in its own actions. Congress lacks both the expertise and the leadership to do more than it has done. The courts, fortunately, haven’t seized control. Which means all three branches of government lack the power to restore confidence in the market.

Does anyone believe that the European Union members — the “leaders” of which comprise most of the G-7 nations — can either lead or finance the recovery? Who among them will restore confidence in the markets? None can or will, individually or together. As much as they may hate the fact, Europe doesn’t have the economic power to do anything more than follow our lead.

American economic power has to restore confidence in the markets for the simple reason nothing else can. But how?

Two things.

First, let’s minimize government intervention in the free market. If it is necessary to inject capital into banks directly, let it be by loans, not by purchasing the banks. Coupled with that must be cancellation of Paulson’s monarchic plan to make the government the home mortgage broker of last resort. People who cannot afford to keep their homes shouldn’t be bailed out by a Treasury Department mortgage welfare program that will burden taxpayers for decades to come.

If there’s any way to prevent the housing market from recovering it’s nationalizing it as Paulson intends. It would be a vast improvement to remove the government compulsion for banks to make home loans to people who are not financially qualified to repay them.

Second, let’s tell the truth. This financial crisis, like the ones that have come before, must be worked out by free market forces or it will not be worked out of at all. And this will take time: months, perhaps years.

Throughout history, courageous action has often proved to be nothing more than refusing to act rashly in response to panic. Demonstrating that sort of courage will do more to increase market confidence than anything else the government can do. The more government intervenes, the longer the recovery will take.