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Please re-read the post. No where did I advocate a bailout. I am describing what I think are likely outcomes, based on news reports and what one can read between the lines in them.

Greenspan’s idea for a coherent framework to handle investment bank failures requires Congressional approval. And because of key chairmanships and minority members in the appropriate Congressional committees, nothing gets done until a crisis stifles debate and forces hasty legislation.

As just one example, I cite the recent GSE legislation that had ENORMOUS implications for our future, but only Jim Bunning objected and the bill was passed in a New York hurry without competent debate.

I would therefore state that Congressional failures and corruption have contributed substantially to the lack of a coherent framework (or game plan as Yves describes it).

As the governmental entity directly responsible for investment bank regulation, the failures of the SEC are also a primary consideration here.

One reason why I describe this catastrophe as a nuclear war battlespace is that we are trying to deal with a rapid succession of massive and spectacular implosions.

An extraordinary amount of time has been spent over the last two months trying to bring a coherent approach to the GSE fiasco. The thousands of person-hours spent on that enormous task diminished the time available to address looming nuclear implosions at the investment banks. It’s an opportunity cost type of thing.

I would disagree with the statement that Bernanke is fighting deleveraging. It is clear from his paper in the Vol. 84, No. 4 issue of the Kansas City Federal Reserve Economic Review that he believes that excessive leveraging is a key component in creating asset bubbles. He agrees with Buiter on this key point.

As such, I would argue he is not FIGHTING deleveraging here. Rather, he views the correct role of the Federal Reserve as making sure that the Fed fosters stable market conditions for the substantial repricing of risk that must now surely follow.

He (and the Fed) are trying to foster ORDERLY deleveraging. That’s an extremely difficult task, but it is the goal. And Geithner’s temperment is probably more suited to the job than Bernanke.

I think that is a key reason why Bernanke stayed at home in Washington during this phase of the crisis.

Geithner appears to be doing a plausible job at crisis management. I tip my hat to him

Matt Dubuque

The Fed and Treasury surely can bailout everybody, it is the consequences that they cannot avoid.

Anyhow there is a presidential election due November and a handover due January, and the Republican guys at Fed and Treasury would be traitors to their party if they let trivial issues like banks failures reduce their candidate’s chances.

Which way things are going to go will only be known when the new president is known. If it is John, things will go one way, if it is Obama, another way.

Perhaps a combination of circumstances such as the FRE-FNM debt socialisation, general instability and flight-to-quality pressuring foreign currencies might incline China and others to sell rather than buy dollar debt?

Political considerations seem dwarfed by the threat of financial decompensation. It seems plausible that other factors may be dominant. Possibly there is some evident reason why this could not be the case; it would be instructive to hear it considered.