If it's just $1 trillion...

...then it's kinda comparable to the S&L crisis of the 1980s. That one was easier to deal with because the feds (through the FDIC) were already the guarantor of that crisis' bad debts (deposits at small local savings & loans banks). This one is more like the Japanese crisis of two decades ago: bad debt with no government guarantor of last resort. So the feds are doing the only reasonable thing: step in and take over that bad debt.

Unfortunately the feds are also doing something stupid: banning short selling (or is it that margin rates on short interest are being raised to 100%? whatever). As long as the short interest ban is short-lived then the harm will be relatively small. But wouldn't it have been preferable to wait to see if the bad debt takeover alone was enough to squeeze the shorts? Besides, squeezing the shorts does little to restore liquidity, whereas taking over the bad debts sure does (or should anyways, one hopes). Squeezing the shorts through legal means is bad policy: it says the other measures aren't enough, it says "we believe short-sellers are speculators and they should be taken to the shed," it's childish, and it may hurt the normal functioning of markets even once short sales are allowed once more (because now there's a new risk that short-sellers must face, particularly if regulators get used to establishing short interest bans on a per-corporation or market segment basis). Bah.

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I'm an engineer at Oracle (erstwhile Sun), where I've been since 2002, working on Sun_SSH, Solaris Kerberos, Active Directory interoperability, Lustre, and misc. other things.

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