I'm nervous about the FED and Secretary Paulson and their solutions to the current economic challenges. It is seemingly right headed but in both situations we are altering normal market functioning with the intention of creating a better outcome. I'm no economic genius, but I can't recall a time in history that this has worked out.
One of my favorite books, and one I highly recommend to everyone, is A Random Walk Down Wall Street, by Burton Malkiel. In this book he talks about the stock market and how it is virtually impossible, or at least extraordinarily rare to beat the market over time. I know this from personal experience, both watching my families managed accounts and managing my own funds, both in the stock market and the currency markets.
That said, the reason you can't beat the market is the fact that the market is unbelievably efficient. The moment a news report comes out it is digested into the market, earnings reports, scandals, wars, horrors, good news, expansions etc. The market takes the information and instantaneously re-allocates. With this in mind it begs the question, "how do you exploit a market that has virtually instantaneous information on which to base it's decisions?" The answer is, "you don't." You play the averages and the indexes of the market.
With this as a backdrop the reaction to the housing crisis seems fairly simple, you let the market sort it out. There are going to be bankruptcies and short sells and problems for many people and many companies but in the long run the market will adapt and correct faster than a non-market solution will allow. Once we impose non-market solutions we simply force the market to deal with inefficiencies, we cause more indecision and capitulation, none of which helps anyone over the long term. Unfortunately the best action may be no action, maybe, to let it shake out, to take our lumps for mistreating the financial systems, for greed, and carelessness. The market will right itself and continue forward, albeit after a painful moment.