Among the many charms of the holiday film classic “A Christmas Story” is its explanation of playground etiquette at a 1940s-era grade school. A threat was not binding until it escalated through the sequence of a dare, a “dog dare,” and a “double-dog dare” to the binding promise of a “triple-dog dare.”

This past weekend, Treasury Secretary Henry Paulson made it clear that, given limited government resources, federal assistance would not be extended automatically to financial institutions in distress. Two storied companies bore the brunt of that decision. Lehman Brothers, a 158-year-old firm that began trading cotton before the Civil War, declared bankruptcy, and Merrill Lynch, the investment bank with the broadest national footprint, was swallowed whole by Bank of America.

In the event, Paulson’s threat was at best a double-dog dare. On Tuesday, the Federal Reserve offered $85 billion in loans to American International Group (AIG), a multi-tentacled holding company engaged in insurance and insurance-related activities. In return for disbursing these funds over the next two years, the U.S. government will receive a four-fifths equity interest in the firm. The loans are expected to be repaid from asset sales as AIG winds down.

Thus, the line in the sand that Treasury drew over the weekend was obscured within a few days. The limits of the safety net underneath U.S. financial firms are once again indistinct. This distorts the incentives of market participants in two significant ways.

The limits of the safety net underneath U.S. financial firms are once again indistinct.

First, the managers of financial firms that may be backstopped by the government are granted time to postpone the hard job of cleaning up corporate balance sheets. Hope is always a strategy, because if enough time passes, events might turn in favor of the losing assets now dragging down corporate values.

Second, speculators are given a strong motive to scan the financial horizon for the next firm that will be bailed out by the government. The government is quite predictable when it acts: authorities intervene in a failing firm to protect debt holders at the cost of diluting shareholder interests. A speculator who guesses correctly on the next target of government intervention will profit handsomely from the early purchase of its debt and the short sale of its equity.

Providing some clarity on the limits of government assistance was supposed to discipline managers and rein in speculative impulses. That was the story on Sunday. On Tuesday, it was once again possible to be “too big to fail.” Or too interconnected. We cannot always be sure of the precise rationale for federal action because the authorities seem too occupied with their next intervention to provide a compelling justification for the last one.

Indeed, action has come so fast and furious that it is unclear whether all the details have been decided, let alone explained. For instance, the Federal Reserve told us Tuesday night in a press statement that “the U.S. government will receive a 79.9 percent equity interest in AIG.”

So the Fed is making the loans but the U.S. government is getting the shares? Perhaps the lawyers have not figured out how the Fed can own equity. Or perhaps those shares will be a gift from our central bank to another, as yet undisclosed agency of the government.

Federal officials presumably believed that some of AIG’s investors were sufficiently unsophisticated as to warrant protection. The firm may have presented a systemic threat, given its trading in over-the-counter (OTC) derivative instruments. Fears of cascading defaults loomed large in the bailout of Long-Term Capital Management in 1998 (which involved no taxpayer funds) and in the rescue of Bear Stearns this past March (which did). OTC derivatives constitute one of the least-regulated and least-understood markets, yet they provoke some of the worst fears among government authorities.

The protagonist of “A Christmas Story,” Ralphie, would not be surprised. His holiday season is almost ruined by the adults’ distrust of the coolest, sleekest toy on the market, “an official Red Ryder carbine-action 200-shot range model BB rifle with a compass in the stock.” The adults are worried that he will shoot his eye out—and he almost does. But in the end, Ralphie proves more resilient than expected.

On Sunday, the feds seemed inclined to bet on the resilience of our financial system and suppress their fears of the worst-case scenario. But the pending collapse of AIG reignited those fears, leading to yet another government bailout. Now market participants will be speculating on the next bailout. Where will it stop? Or, to put it in Ralphie’s terms, when will Secretary Paulson issue a triple-dog dare?

Vincent R. Reinhart, the former director of monetary affairs at the Federal Reserve Board, is a resident scholar at the American Enterprise Institute.

Image by Getty.