Leaving aside the fact that the federal government has a nearly endless supply of money, especially if the Chinese continue to buy its bonds, the capital being pushed into the market is going to the wrong places.

Saving large financial firms like AIG (AIG) is a "from the top down" approach. It attacks problems once they have festered at huge institutions. The bailout solves the surface problem of liquidity, but does almost nothing to address the root issue. As a matter of fact, it may erode the recovery of the most critical portion of the crisis, the housing market.

Until falling home sales begin a reversal, the systematic trouble of leverage at banks, insurance companies, and brokerage firms will grow. If the value of the asset creating the fulcrum is dissolving, nothing which rests on it can rise.

The Commerce Department reported that starts of new homes fell 6.2% to a seasonally adjusted annual rate of 895,000, the lowest in 17 years. Building permits for single- and multiple-family dwellings fell 8.9% to a 26-year low of 854,000 annualized units.

The combined total of the capital put into AIG, Fannie Mae (FNM), and Freddie Mac (FRE) could easily top $200 billion. The market caps of the ten largest financial companies in the US have dropped more than $700 billion in the last year. There is no accurate figure of how much the Fed has loaned banks at low rates through its "window", but what is certain is that the paper the agency has taken is not worth $1 on $1.

The extreme pressure ripping at the US economy will have to be addressed from the bottom up. Having the Fed give money to banks may help them rebuild their balance sheets, but these banks are not pushing that capital into the larger financial system and it is certainly not going to mortgages.

The problem with the financial infrastructure is granular, and for that reason it cannot be negated by saving the largest institutions. If the homeowner is not "saved" the balance of the system cannot be healed.

Douglas A. McIntyre

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