“Almost exactly 101 years ago, J P Morgan was the lender of last resort in the panic of 1907. He, George Baker, and four others would try and ascertain which companies were hopelessly overextended and should be allowed to fail, and which were essentially healthy and could be saved. Somehow they would find ways to supply liquidity where it would do the most good. They scrutinized the collateral offered by all borrowers. When they could not determine whether Knickerbocker had enough assets to secure a loan, Morgan decided not to intervene. Finally the Trust Company of America came up with good collateral- “boxes and stacks full of certificates” - and Morgan said, “This is the place to stop the trouble.”

That’s what Bernanke and Paulson should be doing—find the boundary line of quality and offer to lend to all those with assets above that line, not below it.