The Obama administration began talking about imposing rules on Wall Street's dizzying compensation packages almost as soon as it took the reins on the staggering taxpayer bailouts that proved necessary to avoid an economic Armageddon. Last week, the administration put some long-needed teeth on its jawbone.

Washington first ordered cuts last Wednesday in executive pay and compensation packages at the seven financial companies that received the bulk of taxpayer bailouts. On Thursday, the Federal Reserve unveiled a broader plan to crack down on pay packages that encourage bankers to pursue short-term investment strategies that threaten their banks' and stockholders longer-term financial health.

Some conservatives immediately panned the rules as an intrusion in free markets that jeopardize Wall Street's entrepreneurial spirit and gives courageous investors the profit incentive that keeps the economy vibrant. If Wall Street's financial masters of the universe were only investing their own money in risky schemes that wouldn't need a taxpayer bailout to avert another Great Depression, we could agree with the conservatives. But as the last year's events indelibly illustrate, that's not the case.

Indeed, the argument could easily be made that the new rules don't go far enough. Certainly they don't claw back the record bonuses that some Wall Street firms plan to pay this year, now that they have rushed to pay repay the tens of billions in bailout funds that helped keep them solvent during the heat of the financial crisis.

Goldman Sachs already has set aside more than $16 billion for compensation this year, and JP MorganChase and Morgan Stanley aren't far behind. Yet these firms benefited enormously not just from direct bailout loans, but also -- and mainly -- from the loans, now totaling $180 billion that Washington gave to AIG, the linchpin of the global financial meltdown. That lending let AIG make good on its credit-default swaps to Goldman Sachs and other global investment banks on their investments in the high-risk derivatives that tanked on toxic mortgage loans.

If American International Group had bankrupted over its credit default swaps, a form of unregulated insurance for which AIG had minimal reserves, the global financial system would have imploded. In that context, the restrictions limiting compensation just for the seven banks and companies that still owe the government for bailout funds seem inadequate.

Still, they are useful and imminently fair. They would slash the cash portion of executive compensation on average by 90 percent. The balance would be limited to stocks that could not be sold for at least four years, and until the companies repay their bailout loans. Overall, the plan by Kenneth Feinberg, the pay overseer appointed by the Obama administration, would cut in half the average compensation for 175 employees -- the top 25 at each of the seven firms. It would leave most of their cash salaries under $500,000 -- a far distance from the millions they might otherwise draw.

That does not mean that some top executives will not ultimately receive the tens of millions of dollars promised them in pensions and stock options, but it will require the companies to recover the much of the value of their stock before their compensation materializes.

The restrictions on compensation are an appropriate response to the public anger that erupted earlier this year when firms propped up by taxpayers, whose retirement investments had cratered on Wall Street's collapse, announced that they would be still be handing out hundreds of millions in bonuses to the wizards who triggered the financial debacle.

Perhaps more important, however, are the principles revealed Thursday by the Federal Reserve Bank to extend regulatory oversight over executives, traders and deal makers of the 28 biggest investment banks and trading brokerages, and thousands of smaller banks.

The rules may not reduce the biggest pay packages on Wall Street. Rather, the confidential oversight regime, a compensation review and approval process to be conducted confidentially with the largest investment firms, is intended to tie compensation to viable, long term investment strategies as opposed to the short-term manipulations that let executives rake in lavish fortunes but lead to hard crashes for their companies, ordinary stockholders and the financial system at large.

It is questionable, of course, whether rules can be effectively formulated to forestall risky investment practices. Beyond that, applying principles to practice will require diligent inspection and effective enforcement.

The teeth of such a regime is already under fierce attack in Washington by Wall Street and its minions of lobbyists and sympathetic lawmakers in Congress, who rely heavily on Wall Street's rich campaign donations and fix their legislative agenda accordingly. Proposing higher principles for long-term investments and stockholder value is one thing. Putting staff and principles in place, and gaining congressional support to enforce the idea, remains the key challenge.