IN THE ideal world of economics, firms that take excessive risks go bankrupt, their competitors pick up the pieces and the economy marches on. Some call it "creative destruction." In the real world, certain financial institutions are so big and so interconnected that their collapse -- no matter how richly deserved -- threatens plain old destructive destruction. Government steps in, with taxpayer money, to prevent that.

The problem of "too big to fail" is at the heart of the current crisis, in a double sense. Despite government disavowals, the perception that the feds would bail out the likes of Bear Stearns or Fannie Mae permitted such firms to pile on risk without corresponding discipline from the market, thus hastening the ultimate collapse. And, once the...