Among the Federal Reserve System’s primary responsibilities, none outranks maintaining “the stability of the financial system and containing systemic risk.”

Fortunately, the Fed rarely has had to prioritize that responsibility but the deepening credit market crisis has forced the Fed to intervene in ways that have shattered the promise of free-market capitalism, according to some. That may be a bit extreme, but the Fed’s actions have sounded a Pavlov’s bell for Washington’s watchdogs, drooling at the chance to “save” us from perceived market failure with new regulation.

In the realm of economics, markets “fail” when they fall short of their primary mission — the optimal allocation of scarce resources. In the real world few, if any, markets precisely meet the theoretical paragon, but the broad and deep financial markets usually come close.

In the case of the financial markets, the “efficient market hypothesis” holds that the price of a particular security reflects all information relevant to that asset. Clearly, asset prices should reflect public information but the “strong form” interpretation of the EMH maintains that an asset’s price also would incorporate privileged (insider) information. In any case, however, the EMH implies that the price path of a security should reveal the evolutionary history of pertinent facts about that security.

Consequently, the plunge in the value of Bear Stearns stock, BSC, hours before the Fed’s intervention, implies a sudden discovery of new information. The behavior of Bear Stearns stock price in the weeks and months before its sudden collapse offers some context.

From mid-2007 to its collapse mid-March, BSC shares as well as the stocks of other financial firms had fallen sharply. Undoubtedly, this reflected the growing disenchantment with the prospects for financial intermediaries. Just one week before the Ides of March weekend, Bear Stearns shares closed at $70.08, a loss that signaled growing unease with the company’s prospects. But in the final week of its independence, BSC shares collapsed to $30 before intervention.

What new information justified such a sudden drop in price? Judging from sworn Congressional testimony, neither regulators nor company insiders saw anything that would have warranted the price collapse. According to the chairman of the Securities and Exchange Commission, Christopher Cox, Bear Stearns “at all times … had a capital cushion well above what is required to meet the Basel standards.”

Mr. Cox also testified that the SEC’s liquidity monitoring models revealed no hint of the impending disaster. Bear Stearns insiders also failed to foresee the sudden cessation of funding. Bear Stearns Chairman Alan Schwartz, eager to dispel rumors about his company’s health, attested that Bear Stearns was over-capitalized by the Basel standards and that its “liquidity position has not changed at all.” A day later, however, that liquidity had vanished.

In what Mr. Cox called an “unprecedented” withdrawal of fully collateralized lending, few counterparties were willing to risk their own firm’s capital by ignoring the rumors swirling through the markets about Bear Stearns financial condition.

The abrupt cessation of lending to Bear Stearns should not be seen as validation of the rumors. Instead, misinformation, in the form of unsubstantiated and perhaps maliciously disseminated rumors, seems to have sealed that firm’s fate.

If new regulation is to avert a similar collapse in the future, it must somehow conjure new sources of information or superior ways of assessing what already exists. But since the onset of this crisis last summer, the lack of critical information or, more accurately, ignorance about the properties and implications of assets embedded in complex derivative products has undermined attempts to establish “intrinsic” values. At another level, incomplete information about the exposure of counter parties further has impaired the price discovery function of the marketplace.

When incomplete knowledge and misunderstanding are the reason for market failure, how would better regulation or closer scrutiny of the markets and their participants have made a difference? Neither public disclosures nor the non-public information available to the SEC disclosed the fatal flaw in Bear-Stearns business model.

Other firms with similar leverage and capitalization have thrived in the past and many do so now. Only if regulation can tease out additional relevant information can it be effective in preventing similar crises. Yet if that same information were widely available, the market place would provide an efficient enforcement mechanism making regulation redundant.

Whether or not regulation can improve the quality of information, policymakers already have tools that can limit the contagion effects of misinformation. In particular, the Fed’s role as “lender of last resort,” often plays an overlooked role in assuring the safety and soundness of the financial system itself.

In complex and highly interrelated markets, the collapse of confidence about any one party can jeopardize the entire system. By standing ready to support a particular institution facing extreme liquidity impairment, a “lender of last resort” can mitigate the risks of systemic contagion. The Fed’s readiness to lend in times of illiquidity to otherwise healthy financial institutions generates a systemic “externality” by bolstering confidence in that institution.

The early evidence that the Bear Sterns downfall did not spread to other similarly leveraged institutions supports the notion that wider access to the discount window facility has helped stabilize the entire system. Had the Fed allowed “lender of last resort” access to the primary dealer community earlier in the crisis, it might have been able to avoid taking on a new and more controversial role of being the “buyer of last resort.”

Mr. Resler is the managing director and chief economist at Nomura Securities International, Inc.