NEW YORK—As the credit bubble ballooned, Washington played a vital role: Enabler.

Now the bubble has burst. The federal government is cleaning up the mess with mops made of taxpayer dollars in what may prove to be the most expensive federal bailouts and takeovers in history. As Washington writes billion-dollar checks, critics are looking back at the actions—and inaction—that set the table for the crisis, saying that for more than a decade the federal government whittled away regulations and defanged the agencies that were supposed to protect consumers.

“For the last eight years, this administration has been systematically against any form of appropriate regulation and supervision of the financial system,” said Nouriel Roubini, a finance professor at New York University. “It was a race to the bottom. The ideology was laissez faire, free markets, reliance on self-regulation, which means no regulation.”

Now, the ideology seems to be just the opposite of free markets healing themselves. Critics say the government was absent when Wall Street grew rich off risky bets, but have run a fire drill when those bets blew up.

“The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once vaunted free market economy,” money manager Peter Schiff wrote to clients last Wednesday following the government rescue of giant insurer American Internation-al Group.

The ultimate bill for taxpayers could run more than $1.3 trillion as the government tries to clean up the mess made by one of the worst financial crises since the Great Depression of the 1930s. The 14-month old turmoil began when home buyers with less than stellar credit began to default on their mortgages. Foreclosures soared. The problems spread to more creditworthy borrowers. Hedge funds, banks and other investors in mortgage-backed securities took a huge financial hit. Over the past six months, some of the biggest names on Wall Street went out of business, merged or revamped their structure.

Looking back on how the mess was made, critics say regulators’ absence wasn’t the sole cause of the bubble, but Washington’s decisions set the stage for the crisis and exacerbated it once it began.

The most important decision may have been the Federal Reserve’s move to keep interest rates near all-time lows for three years, which acted as a clearance sale for borrowers.

The Fed cut its target short-term interest rate for overnight loans to banks, the federal funds rate, from 6.5 percent in 2000 to 1 percent in 2003. Loans for cars, homes and houses were on sale, almost 85 percent off.

Cheap credit spurred the rise in housing prices. The Fed viewed that rise as fuel for the economy after the burst tech bubble and the Sept. 11, 2001, attacks.

“Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well,” former Fed Chairman Alan Greenspan told Congress in July 2002.

At the same time, international changes in bank regulation in 1988 and 2001 lowered banks’ reserves.

The reserves, kept in banks’ vaults and with their regional Fed banks, are their cash cushion; when borrowers don’t pay back loans, banks can cover the shortfall with their reserves. That meant they had to hold on to less money when they made loans, effectively freeing more money to lend, but giving them a much thinner cushion if loans soured.

The regulations also allowed banks to keep some debts off their balance sheets—the snapshot of a company’s financial condition that helps investors gauge its health. Off-balance sheet deals, which led to the downfall of Enron Corp., let companies take on debt or make loans without putting those loans on the books shareholders and regulators see.

As a result, banks’ total loan portfolios looked smaller than they were, allowing them to hold even less cash as a proportion of real total loans. Banks’ average cash holdings as a percentage of deposits shrank from 9.7 percent in May 1990 to 4.3 percent in May 2008, according to Ricardo Cabral, chair of the management and economics department at the University of Madeira in Portugal. Larger banks kept even smaller reserves.

Under the new rules, banks’ reserve requirements were set, in part, by their scores from credit rating agencies.

“In a sense, the regulators outsourced regulation to the ratings agencies,” said Mark Zandi, co-founder of Moody’s Economy.com. The idea was the ratings agencies had a process, the models and the data to judge how much cash a bank should keep on hand.

“The downside: It probably gave regulators a false sense of comfort,” he said.

Another problem: The ratings agencies were wrong about how creditworthy many banks were.

The ratings agencies couldn’t see the off-balance sheet loans. They were also wrong about the safety of the loans they could see, because the agencies only used numbers from good times in their mathematical models of how mortgages would be paid. Those models proved useless in bad times.

The stage was set for a crisis.

As if to hasten one, the federal government crowded out state regulators.

In 2003, the federal Office of the Comptroller of the Currency, which supervises all national banks, said states could not regulate a bank’s mortgage lending if the bank had no branches in the state. Wachovia Corp.’s mortgage subsidiary promptly sued Michigan’s bank regulator, claiming that its mortgage unit there was no longer subject to Michigan state regulation.

All 50 state attorneys general and every state bank regulator fought to keep oversight of banks’ mortgage lending. In April 2007, the Supreme Court ruled against the states, by a vote of 5 to 3. Writing for the majority, Justice Ruth Bader Ginsburg said the decision was consistent with law to prevent “diverse and duplicative superintendence of national banks’ engagement in the business of banking.”

Message: Leave big banks to the federal regulators. In a dissent, Justice John Paul Stevens said the court’s decision “threatens the vitality of most state laws as applied to national banks.”

The states complained that the Comptroller was a pussycat of a regulator. The agency is hardly independent, since it receives no congressional funding, wrote Manhattan District Attorney Robert M. Morgenthau in The New York Times. Instead 96 percent of its funding comes by tapping the banks it regulates, 70 percent of total funding is from large banks.

Now those banks are in the middle of the worst financial crisis since the 1930s and the era of big Wall Street investment banks has drawn to an ignominious end. And now legislators have signed a $700 billion plan to buy soured mortgages and other assets from banks to prod them to begin lending again. In the heady years of deregulation, they took on more debt than was good for them, and now taxpayers could end up paying the price if the government can’t turn a profit on the deal.

It’s too early to tell whether new lending will lead the United States out of the current slump or even inflate another bubble.