Mitt Romney won the debate, again. But the former Massachusetts governor’s response on financial bailouts — past and future — was a muddle. 

Bloomberg’s Julianna Goldman asked the question: 

Governor Romney, it’s 2013, and the European debt crisis has worsened. Countries are defaulting. Europe’s largest banks are on the verge of bankruptcy. Contagion has spread to the U.S. And the global financial system is on the brink. What would you do differently than what President Bush, Henry Paulson, and Ben Bernanke did in 2008?

Romney had a terrific opportunity here. He could have said:

As president, I’ll make sure that what happened in 2008 never has to happen again.

TARP and other bailouts are not in the past. The bailouts have done incalculable damage to the nation.

This harm can’t be counted up in TARP dollars. Rather, it’s the harm that’s been done to our priceless free markets when some companies don’t have to play by free-market rules. Just as General Motors and Chrysler shouldn’t have been bailed out, neither should have AIG and Bank of America.

It’s government’s job to make sure that long before a financial crisis happens, the rules are in place to allow any company, no matter how big or how small, no matter whether it’s in the financial industry or the tech industry, can succeed or fail. We didn’t do that in the years before 2008. By the time of the bailouts, it was too late. 

As president, I’ll make sure that the rules are in place to limit borrowing in the financial industry, and to limit the obligations that financial firms can take on through complex derivatives, so that the U.S. taxpayer never again has to save a particular company — or its bondholders or other creditors — in order to try to save the financial markets.

When I’m president, I’ll work to make sure that the next time that a large bank or insurance company in America fails — and it will happen — you can be sure that the company’s bondholders and other investors will take the hit, so that taxpayers don’t have to. 

Instead, Romney tried to wiggle out of the question until he accepted that, as Julianna Goldman put it, another financial meltdown is a “very real threat” that voters really do think about.

Then he said something strange about Greece: “Are they going to default on their debt, or are they not? That’s a decision which I would like to have input on if I were president of the United States.” The only way to have “input” on such a decision, though, would be to pony up bailout money for Europe. 

Then Romney said that “No one likes the idea of a Wall Street bailout. I certainly don’t.” That was hardly a resounding commitment. No one likes a root canal, but sometimes one is necessary.

Romney used this root-canal language again when debate moderator Charlie Rose asked point-blank if “there is no institution, no financial institution, that is too big to fail.”

“Well, no. You don’t want to bail out anybody,” the governor said. He then added that it’s a “terrible idea” to “protect the shareholders.” But shareholders weren’t the force behind the 2008 bailouts. Bondholders and derivatives counter-parties were. 

Romney said further — in the passive voice — that “action had to be taken” in 2008, but that “Were there some institutions that should not have been bailed out? Absolutely.” The institutions he mentioned by name, though, were auto companies, not, financial firms. 

All in all, the audience got:

• a confused defense of the Bush administration’s 2008 actions; 
• a failure to acknowledge that though those actions may have been necessary, the country’s failure to create a consistent system through which large banks can fail continues to poison the economy to this day;
• a failure to explain how to make sure that it doesn’t happen again; and
• a stab at standing up for free markets when it comes to specific car companies but not when it comes to specific financial companies. 

Romney is doing well, and getting better every day. A half-hour later, he gave a good answer on China. He said that America’s failure to ensure that China plays by the rules means that we “will get run over by China, and that’s what’s happened for 20 years.”

The governor should sharpen his answer about the nation’s failure to ensure that financial firms, too, play by the rules. His response on Wall Street should be as clear and strong as his position on China. It will come up again.

— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal and author of After the Fall, now in paperback and e-book.