The Federal Reserve, in addition to dramatically cutting interest rates, has opened up its massive reserves to Wall Street securities firms for the first time since the Great Depression in an effort to stabilize a jittery financial system.

This move, along with a Fed engineered rescue of troubled investment giant Bear Stearns, raises the prospect of new supervision of Wall Street firms that had previously escaped regulators.

“My guess is that the Bear Stearns deal will unleash a new round of financial regulations,” says Irwin Stelzer, an economist at the Washington-based Hudson Institute.

“If federal money flows, can regulation be far behind?”

Allan Meltzer, a professor of political economy at Carnegie Mellon University, says the Fed agreement to guarantee US$29 billion in troubled Bear Stearns assets was a mistake.

“This action transferred potential losses from the market to the taxpayers,” he said. “I do not believe the present system can remain if the bankers make the profits and the taxpayers share the losses.”

John Makin at the American Enterprise Institute said the Fed rescue was “an unprecedented step, roughly equivalent to the use of emergency Fed powers not employed since the Great Depression,” and says that with the aid, regulation is inevitable.

Treasury Secretary Henry Paulson, a former chief executive at Wall Street titan Goldman Sachs, said the collapse of Bear Stearns highlights the need to think about regulation of securities firms on the same terms as banks.

Paulson said his office is working on a “blueprint for regulatory reform” that will address the question.

“This latest episode has highlighted that the world has changed as has the role of other non-bank financial institutions, and the interconnectedness among all financial institutions,” he said.

“These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.”

Yet some analysts say a new regulatory scheme may not end the crisis if the U.S. housing market sees a further meltdown. This has spurred talk about a government-led rescue with new guarantees for shaky mortgages.

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