Reader João Carlos notes in comments:
The real problem guys isn’t that the FED needs to save the banks or the economy goes caput.
The real problem is that maybe the FED doesn’t have enough ammunition to save the banks.
There are a lot of derivatives in the banks’ books. While all mortgages’ securities are currently caput (yes, all, with the house’s prices going down down down down, everyone is sub-prime, including those that are prime), soon we will see other derivatives (commercial estates, credit cards, etc) going caput too.
So, it is possible that FED will try everything possible and impossible and still fail, because the hole is a Black Hole.
Cactus here. I’m not at all sold on the idea that even if half the investment banks on Wall Street collapsed, we’d be in Great Depression-land. But I do note this… if the problem really is severe enough that the Fed cannot handle it, its best to let Wall Street melt to the ground. See, what creates something resembling a South American country during the hyperinflation days is the public catching a whiff that there’s something going on that both the central government and the Central Bank are powerless to stop. Citibank collapsing won’t do it. An attempt to save Citibank that fails will.
Note to Ben Bernanke and Henry Paulson: having the public pay for Jim Cayne’s country club membership and other retirement bennies just isn’t worth the risk. Please stop. Please.