I haven't seen this suggested anywhere but it seems like this might work:

Treasury should require that all CDS contracts be reported immediately. The government could declare that all swaps not involving a legitimate insurable interest are contrary to public policy and must be unwound (i.e. cancel the contract and return the premium). I believe this would alleviate much of the insolvency overhang with firms like AIG without having to bring down the financial system.

Some hedge funds that placed big bets on firms failing will not get their big payouts. Also, since many of these same firms have been targets of short selling (attempts by the holders of the CDS insurance to induce a failure?), some of the pressure on the stock prices would be alleviated.

It may seem a bit extreme, but not any more so than bailouts and cramdowns of securitized mortgages. What am I missing?

@ Soliel

There's no such thing. Policy makers are making up solutions on the fly. They have to because we've never been through something exactly like this.

In college and grad school during the 70s and 80s, I studied the economics lessons of the Great Depression. No doubt, generations of students to come will be studying the lessons of this crisis.

In the short-run, they are not equivalent.

In the longer run, I agree with IaintBacchus. Take care of the economy and the stock market will take care of itself.

@ Soliel: repeating nonsense over and over won't make it right. It's not Obama's fault that the banks are going down the tubes. He is being asked to fix a big mess that was made before he got there.

"Talk to the hand."

I've got your stimulus package right here!

I was originally a believer that the government's response to last fall's financial collapse should be on a case-by-case basis as opposed to just throwing gobs of money at the problem. However, as it got worse, I became convinced that immediate action needed to be taken. And there was general agreement by reputable market pundits as well as our political leaders that immediate action needed to be taken.

It seems likely that, if nothing had been done, things would have gotten much worse...if for no other reason due to a perception that government wasn't responding.

I don't even blame Paulson and Geitner for conducting a somewhat confused bailout. We are in uncharted waters and not everything that is tried will be successful.

What I don't forgive the FED and Treasury for is the appalling mismanagement of the first $350 million. Bonuses to management...dividends to stockholders...lack of upside to the taxpayers for their investment...lack of accountability and benchmarks for the recipients of the TARP funds...Not really knowing what happened to all the money!

And given that we find ourselves in this problem, largely because our financial institutions are "too big to fail", why have the regulators supported the efforts of Citi and BofA to becoming bigger?

There is no excuse for this mismanagement. It gives the impression, true or not, of a regulatory structure that exists to serve the interests of the bankers. I don't understand this meme that "Geitner is the only one who can get us out of this mess." Geitner admitted that the bailout should have been more transparent.

As troubling as his personal income tax situation is, it doesn't bother me as much as the mismanagement of TARP.

I believe it was DeGaulle who said "the graveyard is full of indispensible people" (or words to that effect). Trouble is, Geitner hasn't exactly shown himself to be "indispensible".

This is one of the most abused powers of the executive. Other than Carter pardoning Patty Hearst, I can't think of one that was deserving.

This seems like a no-brainer for a constitutional amendment. It requires passage by 2/3 of both houses of Congress and ratification by the legislatures 38 states. It doesn't seem like there would be much objection.

Obama could score some major good-government points by proposing such an amendment early in his first term.

What am I missing?

Why do workers have to be dependent on their employers to provide a good 401-K program? Some companies have programs with lots of fund options, low expenses, and a brokerage window. A minority of employers offer Roth-style 401-Ks.

Other companies provide plans with few options, apparently on the conventional wisdom that buying and holding a diversified portfolio with an equity bias is always a winning strategy...and employees can't be trusted to make financial decisions with their own money.

This is as important an issue as portable health care. We have an existing system of IRA accounts, that are established by individuals, independent of their employers. There is no reason why the 401-K system couldn't/shouldn't work the same way. Most large and medium sized employers offer direct deposit to the bank of your choice and could provide that same service with the company that you choose to provide retirement fund custodial services.

As much as anything, I think it's about allowing the large mutual fund companies to control our money and how it is invested. This proposal probably wouldn't gain much traction in the financial industry complex...but that's not a good reason not to do it.

Not to pile on to the author of this article, but I'm having trouble understanding her qualifications for dispensing financial advice. Most of her other contributions to Salon are about TV shows and celebrities.

People need to learn not to take financial advice from people who aren't qualified to be giving such advice. An article on that subject would have been more useful.