WASHINGTON, March 30, 2008 (AFP) - A deepening economic crisis has led to unprecedented actions by US policymakers that raise questions about how far government regulation should go in a free-market economy, analysts say.

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 29 billion dollars 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 US housing market sees a further meltdown. This has spurred talk about a government-led rescue with new guarantees for shaky mortgages.

Although the Fed has effectively assumed billions of dollars in troubled mortgage securities, some are urging a new effort similar to the 1990s government fund to buy up bad loans in the savings and loan crisis.

Stelzer said a proposal by Representative Barney Frank and similar ones from Democratic presidential candidates on this are 'gathering support even from free-market conservatives.'

The Frank plan 'would have the government insure new mortgages that reflect the new, lower value of the houses,' Stelzer said. 'Lenders would take a loss, but not very different from the loss they would incur if they foreclosed and tried to peddle the seized property in the already-glutted home market.'

Some say the unprecedented intervention by authorities threatens to impede a market correction and undermines the basic principles of capitalism.

Ed Yardeni at Yardeni Research said Fed chairman Ben Bernanke 'made monetary history' by opening the discount window and 'crossed even further over to the dark side of financial socialism' by allowing the firms to pledge illiquid mortgage debt as collateral.

'Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command,' Yardeni said. 'Given the initial positive reaction in stock prices last week, I suppose this means that on Wall Street, we are all financial socialists now.'

Todd Harrison, a former Wall Street trader who writes a blog on the website Minyanville, argues that the Fed is placing its balance sheet at risk by assuming troubled mortgage debt.

'If the economy continues to deteriorate, the Federal Reserve would effectively and eventually become insolvent. It won't go bankrupt -- it will simply print more currency and further dilute the value of the dollar.'

But Harrison said the problems would fix themselves if authorities allowed the free market to work.

'Our current conundrum can be traced back to the implosion of the tech bubble,' he said. 'If we were allowed to take our medicine rather than being injected with artificial drugs, we would already be on the road to recovery.'