WASHINGTON—There is a moment in former Treasury Secretary Henry Paulson’s memoirs when—during a Capitol Hill discussion over a financial rescue plan—he succumbs to stress and suffers an attack of dry heaves in front of a U.S. senator.

This episode is symbolic of what was happening in the country—the panicked spasms of government action to save big banks from going under that Paulson narrates in On the Brink, his inside account of the U.S. financial catastrophe. It is punctuated with episodes of fear; at one point he tells his wife: “Everybody is looking to me, and I don’t have the answer. I am really scared.” The entire government was scared. The result was that between the rescue of Bear Sterns in March 2008 and the rescue of the auto companies in December of that year, an array of bailouts, takeovers and money-pumping acts of desperation gave the U.S. government near-dictatorial control over much of the world’s foremost economy.

We think of statism as born out of altruism or megalomania. But here a third cause transpired: naked, primeval fear. The notion that people could be left to sort themselves out in the biggest financial crisis since the 1930s was terrifying even for Paulson, a true believer in free markets who keeps repeating in his book that he disliked what he was doing. The fear was so overpowering that Paulson, his colleagues and Wall Street decided to put unconditional faith in the very institution, the federal government, that the author tells us was responsible for the conditions under which the housing bubble occurred: easy money, political incentives for homeownership and regulatory incompetence.

What a fascinating portrait of the statist instinct at work this is. I wonder how many moments of exponential government growth too far back in history for a behind-the-scenes drama to be narrated in detail were dictated by this kind of fear.

Another force powerfully at work was ignorance. The different actors, including President George W. Bush, both political parties, regulators and financiers, were uncertain about much of the information. They could only presume, estimate, and, of course, dread. At no point does Paulson give a detailed explanation—names, figures—of what would have been involved in allowing one of these big financial institutions to enter bankruptcy protection. He didn’t really know. His belief that only government takeovers could save the financial system was born out of the inability to see how one strip in the infinitely complex lattice of the markets connects to the other—i.e., the failure to see that the system was understandably and painfully trying to purge its excesses. All he saw, in that hour of crisis, was that everybody had become mistrustful and credit was drying up. So he presumed that letting some giant banks fail would make things much worse.

How will we ever know whether the financial system might have recovered and trust might have come back by now if the natural process of bankruptcy, absorption of healthy assets by competent players and liquidation of unhealthy parts under clear signals had been allowed to play out?

It is precisely because one cannot apprehend the labyrinth of myriad individual actions that socialism fails. Ignorance is the reason why one man’s power is so dangerous. And yet, as this book so potently shows, the less government knows, the more it feels the urge to intervene. Paulson himself admits that in his conversations with Bush about the credit bubble he could see building up, the Treasury secretary never mentioned a housing crisis.

I can attest to that. As part of a group put together by the World Economic Forum, I was invited to visit with Paulson for an off-the-record discussion soon before the bubble burst. We asked him about the imbalances in an economy that was living beyond its means, in which everybody had credit but no savings. In his affable, grandfatherly manner, this evidently brilliant mind did not once mention that a housing disaster was brewing despite the fact that—as he now confirms—an astronomical $6.6 trillion in mortgage-backed securities, which became known as toxic assets, were staring him in the eye.

How could a government ignorant of what was happening know so perfectly, weeks later, that the biggest government intervention in the economy in almost a century was the only solution? Perhaps because fear can be more powerful than the thirst for knowledge and the truth.