HOW TO SLVE THE FINNCIAL LOGJAM

How to unclog this logjam? The simplest, most obvious way is for the U.S. government to perform financial angioplasty-- guarantee all interbank loans, too, the same as it guaranteed Fannie and Freddie's debt, and some commercial paper and deposit accounts. This step has been whispered about but nothing has been done yet, because even though this would unclog interbank loans, it would also pose an added risk of the government taking on even more toxic debt, which would make the market tumble again.

What should the Fed do, then?

You may be surprised to learn that the problem was solved once already. In 1907 there was a big bank panic on Wall Street. At the time, J. Pierpont Morgan gathered all the beleaguered bank chairmen into his office, scanned their balance sheets, and, acting as a sort of private Fed, performed economic "triage": deciding which banks would close and which would get help.

Why can't the U.S. Fed (or Treasury) do this now, by guaranteeing some interbank loans but not others? There are at least three reasons.

First and most obvious is that there's an election in process, and the flak such a step would bring is potentially very high, so Congress must be kept in the loop.

Second and tied to the first - there are many thousands of banks today, whereas in Morgan's day there were far fewer. The United States is not Soviet-era Russia, and giving government the power to decide which of the thousands would live and which would die is anathema to U.S. basic philosophy.

But third and more mundane - much of this has to be co-ordinated with foreign governments, since banks are connected internationally. And if you think it was hard for Treasury Secretary Paulson to negotiate the bailout bill with Congress, think what it takes to negotiate with Europe. Yet, as with the bailout bill, a deal is more easily done when the far worse alternative stares politicians in the face - and the market's plunge last week may have just been it. Because on Thursday the White House announced it's considering taking a direct stake in some banks - yes, à la 1907's J. Pierpoint Morgan.

Will this do the trick? Likely yes. Long term there's still pain to go through. But once this last federal guarantee is in place in anything but name, the comatose body of the financial system can start working, the economy should revive near the middle of next year, and the market will sniff it fast.