The Federal Reserve on Wednesday joined five other central banks across the world in slashing interest rates to try to head off a globe-spanning recession.

The joint move is unprecedented, particularly in that the Chinese Central Bank joined with the Federal Reserve Board, the European Central Bank, the Bank of England and the central banks of Canada and Sweden to reduce primary lending rates. The Swiss also cut a key rate. The Bank of Japan signaled that it may join the effort.

The move, aimed at restoring confidence to credit and financial markets, was met with initial skepticism. Credit rate cuts traditionally drive stocks higher, but the Dow Jones industrial average Wednesday closed down 2 percent at 9258.10, the sixth day in a skid that has seen the Dow drop nearly 15 percent.

The markets seemed to reflect a growing lack of confidence in the ability of central banks to get a handle on the problem. Traders are yelling for help but are skeptical of the help when it comes. The skepticism may be well placed, at least as it relates to U.S. regulators; had the government practiced some economic preventive medicine earlier in this decade, it could have avoided the financial heart attack we're feeling today.

Months from now, when this crisis has passed, Congress and the new president must undertake a systematic overhaul of the U.S. financial system. There must be tighter regulation of commercial banks and investment banks and new rules for mortgage loans. Banks and investment companies must link management pay to long-term results rather than short-term profits.

Officials at the Federal Reserve will have to acknowledge that they missed the opportunity to prick the mortgage bubble before it grew big enough to pop the nation's economy. We'll need regulators and congressmen who are more willing to stand up to Wall Street — and say no to the massive campaign donations.

The mess started with the hot housing market early in this decade. Home buyers and lenders got the feeling that housing prices would rise forever. With interest rates low, there was a lot of investment money sloshing around the world looking for high yields.

That's how the subprime mortgage market grew gigantic. Lenders made loans to shaky borrowers, repackaged them as securities and sold them to investors anxious for higher yields. Investment executives pocketed big bonuses when those yields fattened quarterly earnings reports.

Few saw the housing price bubble expanding, and no one — at least no one in a position to do anything about it — considered what would happen if it burst.

Lots of those subprime loans landed at lightly regulated investment banks, which were allowed to operate with slim capital. Bear Stearns, for instance, operated with capital one-thirtieth the size of its investments. When investments soured, that slim capital cushion was quickly eaten up, and investment banks were in deep trouble.

Banks operate by borrowing money cheap and lending or investing it dear. They are entwined in a web of interdependence through loans and swaps and other complex financial contracts.

When word spreads that a bank is in trouble, no one will lend to it, and the bank probably will fail. When that bank can't meet its obligations, it damages other banks, setting off a vicious cycle of failure that threatens the entire economy.

This cycle could have been broken at the beginning if regulators had reacted to the housing bubble. The Federal Reserve had the power to limit subprime mortgage lending, but failed to do it.

This is the second such failure in a decade. Regulators also failed to deflate the technology stock bubble, which brought on the 2001 recession.

This is in part because of the hands-off-the-free-market philosophy of former Fed Chairman Alan Greenspan and the Bush administration. If nothing else, the current crisis has taken some of the gloss off Greenspan's reputation.

Congress must enact much tougher regulation of investment banks, including requiring higher capital levels and more transparency about the investments on their books. Investment banks should be subject to at least as much regulation as commercial banks, which see government examiners poking through the books every year and demanding more capital if the bank's risk profile worsens.

Still, the failure of Washington Mutual and the forced sell-off of Wachovia indicate that regulation of commercial banks must be improved, too.

Regulators and the banks themselves should take a closer look at complex financial instruments that bind them together in ways that are understood only weakly. The giant insurer American International Group failed because it sold too many credit default swaps. Those financial instruments essentially guarantee bonds against default — even though no one knew if the companies that issued the guarantees had the money to back them up.

It's a "$50 trillion market with no regulation," complains money-manager Ray Saleeby of Saleeby & Associates of Olivette, Mo. That has to change.

But, more fundamentally, America's "buy now, pay later" philosophy must change as well.

"We as a nation have gotten used to easy credit. The good times let us enjoy a standard of living way beyond our means," says Nasser Arshadi, a professor of financial economics at the University of Missouri-St. Louis.

The future may look a lot like the past, when it took a good job and a good credit rating to buy a house, when banks had to hold something of value before they made a loan, when lenders demanded good, old-fashioned collateral and Americans had to scrimp and save to enjoy the good life.

But there's one sure thing about the current crisis: Americans are going to learn how to scrimp and save.

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