Physicians who spend time in emergency rooms are trained to work on the patient and separate themselves from his pain. Doctors have learned that they must diagnose and solve problems efficiently because there is little time to become attached to a patient and his problems.  Fixing the problem is the goal.

As patients come through the ER, doctors and nurses do their best to see that each person  gets the best care available, that no one gets special treatment, and that patients are either discharged to home or moved on to in- patient care. The sad fact is that some people cannot be helped much. They leave as ill as when they came to the ER.

Wall St. has decided that some companies do not deserve a shot at triage. Because the supply of credit is so limited, some firms will simply be allowed to die before they can be stabilized. These are not worth time or consideration. If the system failed, companies such as Ford (F), Morgan Stanley (MS), or Bank of American (BAC) would be crushed into dust in the matter of a few short hours of trading.

Asking traders to take a step back to breathe hasn’t been an option for several days. Investors believe that if they leave the room for even a moment, that when they return their investments will be have been destroyed 

To make matters worse, companies which may have been competitors but also had worked together for years have turned on each other like jackals. There are concerns that the collapse of Lehman may have been caused, in part, because JP Morgan (JPM) froze some of its assets. Whether that is true, it has the benefit of sounding true. Fratricide has become the order of the day among financial companies. If the market is starved for capital, someone won’t make it. The competition is for who lives to see the next day.

Making money has always been marked by a certain cynicism and blood lust. Traders like to talk about how they take no prisoners. That works well until everyone is a prisoner and the warden is the economy. Then the backbiting becomes counterproductive.

The Fed has tried to steady the deep fear which influences almost every trade. It is unprecedented for a central bank to put $900 billion at its emergency lending window and to offer to buy hundreds of billions of dollars in commercial paper from non-financial companies. It is as close to a universal salvation program as a government can offer. Even that has not worked. Investors run from their own shadows. Each trader suffers from a sort of agoraphobia, afraid to leave his house.

The Fed has run low on options. Bill Gross, bond market genius and head strategist at bond house mammoth Pimco, wants the US central bank to cut rates to 1%. That would seem to be less significant than the gesture of buying huge amounts of commercial paper, essentially lending money directly to American companies. In other words, there is little reason to think it would work because a 1% cut is a lesser measure than a capital infusion.

From the standpoint of the Treasury and the Fed, there are not many cards left in the deck. The value of the bailout is already well above a trillion dollars between the capital put toward buying toxic assets and that being loaned to banks and brokerage houses on an emergency basis often in exchange for collateral that is worth little more than toilet paper. The total effort expended to save the economy is colossal.

All that may be left is for the Fed to mainline capital into the entire system. To do that it would have to take the unprecedented measure of cutting rates to a negative 1% or 2%, essentially paying the financial system a premium to take money. Most analysts would look at that as a deranged approach in part because it has no precedent and no assurance that it will work while it puts taxpayers at horrible risk

There is a better way to look at it. For each $100 billion in capital the Fed would loan out under this program, it would have to come up with annual interest of $2 billion.That risk is not greater than any other in the effort to save the financial system. In some ways it may be less. The principal probably carries very little risk at all.

If the Fed cut to that level, prime lending rates at banks would drop. All of the prime-plus loans for everything from houses to small businesses  would reset much lower. The reasons for borrowing would rise. The risk of lending would fall. Ludicrously low interest rates make more businesses and people creditworthy.

The federal government has already done a number of things which no one believed it would ever do.  A year ago, almost no one would have believed that we would see this kind of  intervention in the fate of Bear Stearns, AIG (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). No one imagined that the Treasury would bail out banks.

Paulson and Bernanke have made it clear that they are willing to exhaust all options as they try desperately to save the patient, the economy on the gurney in the ER.

Douglas A. McIntyre

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