I have always been a strong believer in the role of institutions in market capitalism. The current financial crisis stands as testimony to the failure of the famed market to figure out the best solutions to many financial issues. All of the market's failure culminated in Bear's monumental failure and its subsequent rescue by the tax payers. Some might argue that Bear's failure was merely an organizational failure at a large investment bank. But, a system hanging by the thread to every word being uttered by the Fed indicates how much the so called free markets have come to rely on institutions (government included) for their very survival.
Yes, the market figures out the best solution and money should flow to those sectors where it achieves highest returns. Additionally, government should not intervene in the running of the capital markets. This should not however diminish the importance of regulation and oversight when public money is involved. Due to the intrinsic principal-agent problem in the running of companies, governance assumes great importance. Company boards which were supposed to have solved this problem have turned into puppet shows of shared memberships. It seems to me that a very well managed financial regulator(s) with excellent oversight capabilities and a mandate to act swiftly and decisively will be the only solution to the extremities being created by the markets.
Why should the tax payer come to the rescue of Wall Street, when the street makes so much noise about free market? Wall Street relies on the free markets argument to charge hefty fees and take millions in bonuses, and very conveniently wants the public to bail it out when things go wrong. What about the free market then? Shouldn't Bear be allowed to fail according to the free market standards? Any takers? No, because the public at large is saved from a monumental systemic collapse that might be triggered of Bear were to fail. So, who created this hazard? I guess, it was the tax payer for having let the market run a "firms gone wild" act in the first place.
The entire financial system thrives on future expectations of cash flows. Therein, seems to lie our capitalist modern world's greatest invention and its greatest failure! Predicting its own future.