Historians are likely to look back on this week as one of the most significant in American economic history. This was the week that the government let Lehman Brothers Holdings Inc. (NYSE: LEH) fail -- a record $639 billion bankruptcy, lent $85 billion to keep American International Group (NYSE: AIG) from collapsing, and pumped $300 billion into global financial markets to keep them from seizing up. But that turned out not to be enough to keep the markets afloat -- for that Hank Paulson needed the ultimate bailout.

While I don't remember much of the American History I studied in high school, one thing sticks with me today. It always seems that it takes a major crisis to get America to make big changes. It is never possible for leaders to foresee problems and take action to avert them before they turn catastrophic. The averting catastrophe approach always struck me as far smarter than the crisis approach. However, it seems that lawmakers need tangible evidence of prior bad outcomes to make the case that the status quo is deeply flawed and must change.

While he had already loosened up $800 billion in taxpayer money by Wednesday, Paulson needed an even scarier story to get Washington to agree to an additional $500 billion to create an agency to buy illiquid assets from financial institutions. What exactly did he tell Congress and the president to scare them into agreeing to this plan? AP suggests that he described evidence of the global financial market ceasing to function and painted a frightening picture of the economic and political chaos that would ensue if that functioning ceased for an extended period of time.

Paulson probably conveyed that the basic problem is that the key players in the financial system -- consumers, businesses, investors, and banks are losing confidence and don't want to play anymore. They are all afraid that if they do the things they are used to doing -- such as depositing money in a bank and trusting that it will be there; putting funds into an investment and expecting that it will earn an attractive return; lending money to another bank or to a company and getting that money paid back with interest -- all these activities are now seen as too risky to undertake.

Paulson may have argued that one way to restore confidence in this system was to tell the public that it will use its money to cover any losses. If this promise restored confidence and the system started to function again, then things would be fine. Although a $500 billion estimate has been thrown out there, it is too early to tell how much money will actually be added to the money supply through this latest bailout plan. Most of the big figures thrown around are the maximum amount that could be spent -- they do not take into account the proceeds from the sale of assets that would reduce the final cost to taxpayers.

Having said that, it is likely that massive amount of additional money will be added. But the costs of doing nothing would be even worse. Probably Paulson conveyed that it would lead to global panic -- people trying to get their money out of banks and money market funds and not being able to do so (this already happened with people who hold some of the $330 billion worth of Auction Rate Securities (ARS); lenders demanding their money back and finding it is not there; and investors selling their securities and withdrawing the proceeds.

It is hard to put a cost on a global panic -- but it does not take too much imagination to realize that these events could lead to the dissolution of governments and social order.

It is in this frame of mind that Washington is going to work to try to craft a comprehensive plan to unfreeze the global financial system.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG shares and has no financial interest in the other securities mentioned.