KEY POINTS:
If credit is the life blood of the economy, confidence is the life blood of capital markets. Restoring confidence is the essential challenge facing policymakers now.
Former Federal Reserve chairman Paul Volcker and former US Treasury secretary Nicholas Brady have called for a bolder and, crucially, a more systematic move than the ad hoc lifeline-throwing we have seen so far.
The idea seems to have gained traction.
You could see it as a distasteful, morally hazardous case of privatising the gains and socialising the losses.
Or you could see it as the pragmatic lesser evil compared with a continued haemorrhagic loss of confidence in the global banking system.
Volcker and Brady describe the crisis in biological terms.
The financial system is clogged with enormous amounts of toxic real estate debt that will never be fully repaid.
Until this "decaying tissue" is removed from the system the infection will spread, confidence will deteriorate further and we will have to live through "the mother of all credit contractions".
"The pathology of this crisis is that unless you get ahead of it ... it devours the weakest link in the chain and then moves on to devour the next weakest link."
They propose something like a mechanism used in the wake of the savings and loan crisis of the 1980s: a Government body that would buy up bad property-related debt at some sort of fair value and quarantine it.
That would put a floor under prices, restore liquidity and allow credit markets in danger of seizing up to operate freely again.
It would, they acknowledge, require "serious money".
But as it would be more patient capital than the private sector or the Fed's discount window can provide, the new entity could warehouse the debt for longer and allow for a more orderly liquidation, maybe even a chance for it to recover some of its value, they say.
Easier said than done.
There is a lot of it this time around.
One suspects the poor old American taxpayer will end up taking quite a bath.
But so far banks' cumulative losses have totalled more than US$500 billion ($741 billion). Only two-thirds of that has been replaced by new capital.
And every dollar less capital a bank has means many more dollars of lending it can no longer support.
