Risk is a funny thing. Many people avoid it. Others, such as Wall Street's go-go investment-banking types, relish risk for the rewards it brings if they bet right.

Sometimes, though, the risks become so large that they threaten to hurt people who don't even know they are in the game. That's what happened last spring, when the giant Bear Stearns investment bank began to founder as risk after risk began to go bad.

The impact of a potential Bear Stearns collapse on the larger financial market was considered so serious that Federal Reserve Chairman Ben Bernanke intervened, arranging the forced sale of the investment bank, backed by Fed loans.

Until that unprecedented intervention, few people on Wall Street or in Washington supported the idea of the Fed regulating investment banking. That has now changed. Bernanke has called for federal oversight of investment banks, as has Treasury Secretary Henry Paulson, himself a former investment banker.

And when a Republican administration admits that a bit more oversight is needed for the high-stakes financial games played on Wall Street, you know something fundamental has changed.

The Treasury blueprint for reform makes sense and should be moved quickly from concept to reality. It calls for the Federal Reserve to act as "market stability regulator," ready to intervene if necessary, as it did with Bear Stearns. That will require the central bank to think seriously about scenarios that would cause it to offer aid to troubled institutions in the future.

As Treasury officials wisely note, the Fed can't accurately assess a crisis without access to the books of troubled companies. Under the proposed system, the Fed could join with other regulators in making fiscal examinations of financial firms.

The plan also recommends, long term, a single national regulator to focus on the soundness of banks and other financiers that offer federally insured guarantees to customers. A "business conduct regulator" would also be created to deal with consumer protection issues. This entity would assume responsibilities now handled by separate securities and commodity regulators.

In crafting the new system, Paulson and others have stressed the importance of guarding against what is called "moral hazard." Investors can't come to expect that if they make bad bets, the federal government will be there to bail them out. If that mentality sets in on Wall Street, it could encourage the very type of excessive risk-taking that the reform measures are supposed to reduce.

In fact, the Bear Stearns salvage operation has been criticized by some who argue that the bank should have been allowed to fail regardless of the consequences to innocent bystanders so that it could serve as a warning to others about excessive risk. They point out that by trying too hard to mitigate excessive or foolhardy risk-taking, regulators can actually encourage the very antics they're laboring to prevent.

Paulson mentioned moral hazard last week in noting the Federal Reserve's role as a lender of last resort when financial flashpoints threaten overall markets. "It is imperative that market participants not have the expectations that lending from the Fed is readily available," he said.

Paulson and other members of the president's Working Group on Financial Markets seem intent on working quickly to ramp up oversight systems to a level appropriate for today's fast-moving global markets.

By filling gaps in oversight and increasing interagency cooperation, regulation can be made effective without choking off the innovation and reasonable risk-taking that makes free markets work. It's important that the group complete its work before another crisis tests the end result.

—- Andre Jackson, for the editorial board (aajackson@ajc.com)