one of the interesting things about this credit crunch is how little debt has actually defaulted. the market is pricing in a more cataclysmic seizure than has materialized so far. it's hard to see how the looming mortgage resets won't create waves of panic, so everyone is dead certain a major seizure is coming.
of course, these conditions quickly become self fulfilling prophecies, as the macklowe experience teaches us.
the biggest problem has been the panic about the mortgage bond insurers. I have no idea whether the emering recovery plan will work.. .but here's an idea, borrowed from the california power crisis.... why can't they create a statutory asset for troubled banks and monolines?
essentially, the governemnt guarantees they will not fail: the fed simply decrees that ambac has $50 bln of assets. in case of bankruptcy, the Fed or govt will pay up to that amount to creditors.
yes, this would clearly increase the money supply and be inflationary. but it seems better than just lowering short term rates and opening the monetary floodgates.
this would instill confidence back into the financials and drive away the vultures. and, it would delay the creation of money until a later date ... probably not a bad idea with every measure of inflation blowing past expectations.
it's also worth noting something about this credit meltdown... the last two kinds of debt that blew up seem to be the ones with the fewest problems: corporate credit and commercial mortgages. home mortgages previously were considered the stable assets. it is precisely the fact that people considered them stable that the bubble formed. ... in fact, a similar argument could be made about the dollar. after 2001, the post cold war bubble finally burst.. its final surge had been fueled by the asian crisis. it will probably be 5-10 years before commodities reach a similar status.