Even with our historical-irony sensitivities bludgeoned almost to the point of nonexistence by Communist China's decades-long capitalist swoon, the spectacle of a state-controlled Chinese investment fund saving Morgan Stanley's bacon with a $5 billion cash infusion is something to savor.

You don't get any more capitalist-iconic than J.P. Morgan, the 19th century banker, railroad tycoon and steel magnate. But who would understand the strategic benefits of a bailout better than he? Morgan once organized a bond issue to bail out the U.S. government! Even so, I'll bet, living as he did during the nadir of China's imperial power, that Morgan would never have foreseen the day when a corporate descendant of his banking empire, itself an icon of Wall Street, would be rescued from its own trading missteps by card-carrying socialists.

Because make no mistake, even though Chinese Investment Corp., the "sovereign wealth fund" created in September for the purpose of profitably investing China's $1.4 trillion of foreign reserves, is supposedly empowered to make independent investments, the decision to buy a 10 percent chunk of Morgan Stanley could only have come from the very top.

With Abu Dhabi riding to the rescue of Citigroup and Bear Stearns getting an infusion from another Chinese investment bank, the reputation of New York's finest financiers as masters of the market universe has taken a bit of a hit over the last month. For some, the foreign helping hands are proof that global capital markets are working nicely. Certainly, this is one way to recycle petrodollars and all those greenbacks Americans spend in Wal-Mart on Chinese-made products. But Brad Setser, a Clinton-era Treasury Department economist who spends a lot of time thinking about the implications of the worldwide surge in heavily endowed sovereign wealth funds, is a little perturbed.

His chief source of "discomfort" is China's predilection for making state-owned Chinese banks instruments of government policy. He also wonders what happens "when one government owns a large stake in a firm regulated by another government?" And more generally, he frets that Chinese "government investment decisions will shape the allocation of capital across the U.S. economy even more than they do now."

All these may be valid concerns, although How the World Works thinks the whole deal may have more to do with longtime Morgan Stanley chief economist Stephen Roach's assiduous networking in China than any strategic intent to manipulate the direction of the U.S. economy. But the most intriguing insight Setser has to offer is his reflection on what the deal says for the U.S.'s reputation as a warrior for "free" markets.

A few years ago the consensus view in the U.S. financial community was that China's state would have to relinquish control of Chinese banks in order for China's financial sector to develop. State ownership was generally considered an impediment to a modern financial system. But rather than selling controlling stakes in China's state banks to Wall Street firms, China's state is now buying (non-controlling) stakes in Wall Street firms.

Talk about a change.

There was a time not-so-long ago when the U.S. was on a push to export its form of government (and its form of capitalism) around the world. Remember when the U.S. was criticized for using the IMF to foist privatization on the world? Now both the U.S. government and large Wall Street firms rely heavily on non-democratic governments for financing -- and the U.S. is, in a limited sense, importing other countries' form of capitalism. The U.S. government hasn't historically owned large stakes in U.S. banks and broker-dealers.

State capitalism vs. laissez-faire, American style. It's the final showdown!