If ever there was a week in which the world of Alice in Wonderland became reality, this past one was it.

Lehman Bros. fell down the financial rabbit hole. Merrill Lynch and American International Group narrowly avoided the same fate, looking down the hole, but choosing instead to respectively be acquired by Bank of America, and to accept an $85 billion loan from the Federal Reserve Board in return for a 79.9% stake in the company.

Along with the precipitous fall from financial grace of these three financial giants, a lot of the consumer confidence followed as well, as witnessed by the jittery world financial markets. On Sept. 17, for instance, following the Sept. 16 AIG announcement, the Dow fell 449.36 points to 10,609.66.

Part of the reaction is a result of institutional fear over just how tight credit will become and whether the current financial crisis will deepen.

Part of it is also consumer fear. Branding worked well. Consumers recognize these blue-chip names, and when names that they have come to know ended up at the center of a crisis, they know it is time to worry.

Along with fear, there is also confusion about the events of this week. I always like to hear what the average person thinks about such happenings. It balances the valued views of the industry insiders and analysts who are vital to the stories we place on our Web site and in our magazine.

On the eve of the AIG announcement which was to follow hours later, I was walking on the street eavesdropping on a conversation of two people in front of me. What struck me is how one of the two took a general truth, the trouble AIG was facing, and turned it into his version of fact: the company had already gone out of business. And given their version of fact, what he should be doing–getting out of the market.

Fortunately, his friend responded that she disagreed, that he might be a bit premature, and things might not be as dire as he believed.

And she was right. The Fed stepped in and stabilized the situation, providing the liquidity needed so that AIG management could create order out of chaos.

The confusion prevailed. Later that evening, a conversation among two friends was recounted to me. This followed the announcement. Both felt that the U.S. should not be bailing out huge corporations. While philosophically I see their point, practically speaking, they are off base. The financial carnage we saw this week is nothing compared to what we would have witnessed if government refused to step in.

One of my friends works for a small business. I reminded him that if the U.S,. and conceivably the world markets, are hurled into a deep recession or even a depression because a financial giant with a link in every aspect of business was allowed to sink, then he might be out of work. And there might be a lot of people in his predicament.

The work of The Fed, the Treasury Department under the guidance of Secretary Henry Paulson, and state insurance commissioners, including New York Superintendent Eric Dinallo who spearheaded the effort by state regulators, was right on point.

It really was regulation as it should be: state and federal regulators working together.

And the National Association of Insurance Commissioners says that an NAIC working group chaired by Dinallo and vice-chaired by Pennsylvania Insurance Commissioner Joel Ario will oversee AIG insurance interests and coordinate with federal regulators.

Let’s hope that that moment when there was regulatory accord continues, and that the AIG crisis is not used as a propaganda tool by proponents of federal insurance regulation to push for bringing oversight of the industry under federal purview.