Ben Bernanke, chairman of the Federal Reserve Bank, May 17, 2007:

All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

Henry Paulson, secretary of the Treasury, April 20, 2007:

I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."

Wall Street Journal, Sept. 15, 2008:

The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

Am I being unfair? Yes. If either Ben Bernanke or Hank Paulson were to say, "Oh my God, the American financial system is falling apart and we don't have any idea how to stop it," those very words would ensure that any nascent meltdown accelerated to critical mass in a nanosecond. When the Fed and the Treasury brokered the rescue of Bear Stearns in March we knew exactly what they really thought about the fragility of financial markets. So we can give them a pass. Responsible leadership requires staying calm, assuring the public that matters are under control, and making the best case possible for a scenario under which catastrophe doesn't actually happen. 'Cuz if we all head for the exits at once, we're in trouble.

Except that, here we are, in September 2008, less than two months before a presidential election, and what we are witnessing, in effect, is everybody heading for the exits all at once. The key to understanding Wall Street's woes is appreciating that a lot of people borrowed a lot of money to make a lot of very bad bets. Now, everyone is simultaneously worried that they don't have enough capital at hand to pay their debts when the collector comes calling. So everyone is attempting to sell everything they can find a buyer for in order to raise capital, and lower their debt exposure. This is what is known as "deleveraging." The problem is that when everyone attempts to deleverage at once, the market is flooded with more sellers than buyers, and the prices for everything salable fall, which just makes the whole mess worse for everyone.

It is not an understatement to call the current crisis one of the most devastating challenges modern capitalism has faced in living memory. Bear Stearns, Merrill Lynch and Lehman Brothers are legendary institutions on Wall Street. Bear Stearns got the shotgun wedding with JPMorgan. Merrill Lynch is now a subsidiary of Bank of America, and at last word on Sunday night Lehman was declaring bankruptcy. Their demise leaves only two of Wall Street's five major independent investment banks standing. They were cherished destination employers for America's smartest, most ambitious, most hungry for financial reward young men and women. And they are as nothing before the ill winds of a massive market failure.

There will be much more to say about all these things as the week wends on. Tracking Monday's developments alone will be a full-time job for the entire global financial press. But as we wait for Monday's opening bell at the New York Stock Exchange, let us remind ourselves, once again, of the most important lesson that economists, investors and voters should be taking from this carnage.

Over the past three decades Wall Street sought, and received, a climate of deregulation and minimal oversight that allowed it to create new markets at will, permitted investment banks and commercial banks to commingle their activities, and exempted critical new innovative financial products from any meaningful government restraint.

Now, we are staring at the kind of mess you get when you give 2-year-olds a few buckets of paint and tell the baby-sitter to take the day off. Cleanup is going to be a bitch.