The more the Federal Reserve does to avert financial contagion, the clearer it becomes that the Fed alone cannot solve the problems in the financial system. To many Americans, it’s now obvious that taxpayers will have to step in. Less obvious is that if the United States government doesn’t stabilize the markets, foreign governments increasingly will, in exchange for an ever larger stake in the American financial system.

Over the weekend, Treasury Secretary Henry Paulson Jr. said the government would do “what it takes” to keep order in the financial markets. On Monday, President Bush echoed that point, when he wasn’t making inappropriate jokes. The American people need an explanation of what they may have in mind.

The Fed’s huge loans and interest rate cuts can buy time for flagging banks. They can also help prevent specific problems, like last weekend’s near collapse of Bear Stearns, from causing a chain reaction. They cannot save defaulting homeowners, transform bad mortgage loans into good ones, or do the same for hundreds of billions of dollars of securities tied to those loans.

As those problems persist, financial institutions are under increasing pressure to write off their losses, cutting ever deeper into their capital. As capital shrinks, creditors have to clamp down on lending, to good and bad borrowers alike, no matter what the Fed may do.