You wrote:

Ah, if only adults could be supervising this madhouse. My own opinion is to let them fail, at least go into receivership. The stockholders should be whacked 100%. Then we could move on to the bondholders. Maybe renegotiate the rates being paid back.

Assuming that your are talking about Fannie and Freddie, the problem with whacking the bondholders is that you would be whacking most of the banks in this country big time. They invest their reserves in the debt securities of the two per regulatory guidelines. Take them down and you devestate the banking sector. Just another example of unintended consequences.

We have weaved a very tangled web that is going to take a lot of money and pain to unwind. Don’t count on anything more than more webs, however.

Yet the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses were made public. In 2003, William Poole, then president of the St Louis Federal Reserve, publicly called for the government to cut its implied guarantee of Freddie Mac and Fannie Mae, claiming then that the two lacked capital to weather a severe financial crisis. Poole, whose warnings were dismissed by then Fed chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout.

Meanwhile some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country’s big banks teeter towards a financial implosion. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from sovereign wealth funds in Saudi Arabia and elsewhere to remain in business…”

Ah, if only adults could be supervising this madhouse. My own opinion is to let them fail, at least go into receivership. The stockholders should be whacked 100%. Then we could move on to the bondholders. Maybe renegotiate the rates being paid back. Keep in mind the adage “if you owe your banker $10,000 and you don’t have the money, you have a problem. If you owe the banker $100 million and you don’t have the money, the banker’s got a problem.” In this case the bondholders become the banker. We could kvetch about contract law, but restructuring or defaulting should be considered as the primary options.
At one level, if we defaulted, no one would loan us more and we wouldn’t be able to fund the $700 bil/yr trade deficit. OK, that comes out to around $2350 per person in the US. We really need to have a well-publicized reality check, not further pandering. Can we have a new state, No-Baloneyia, where we don’t do this stupid stuff? Paul Volker for emperor.

Hold the current negative real rate, and inflation will scream.

Whack inflation with rate hikes, and the economy will nosedive as banks die like flies.

Indeed, with the remarkable “reverse Midas touch” of Ben Bernanke, we may be able to achieve both outcomes simultaneously. The last few days, with the announcement of 5% y-o-y CPI, the IndyMac failure, and the scary dip into bear market territory, provided an illuminating preview.

Within his premises, Stern may be a reasonable guy. But his central-planner premises are flat wrong. CENTRAL BANKERS CANNOT ADD VALUE BY MANAGING THE ECONOMY. Don’t tamper with the Fed Funds rate, Gary. Just resign, and work to abolish the Creature From Jekyll Island. You’ve done enough to us, dude.

Increasing the discount rate will only make things worse.

We don’t have the Japanese option of controlled deflation because we do not save and we do not have a trade surplus.

We have now reached a peak oil plateau that will cause demand destruction around the world. When the depletion rate kicks in the fractional reserve banking model will implode.

Today’s gambit from Freddie about raising new capital seems to be a last ditch effort to maintain the status quo. Since it was accompanied by talk of shrinking its balance sheet, the likelihood of its success seems dubious at best.

That also kinda sounds like practically every otc market on the planet.