If we are going to have a government-as-hedge-fund intervention aimed at preventing temporary liquidity problems from causing contagious credit collapses, I would prefer to temporarily (say for six months) offer a guarantee of high-quality borrowers, especially industrial AAA commercial paper (possibly in return for a fee of a few basis points). In all lilelihood, this will cost the taxpayers nothing and it will let all the solvent firms meet their payrolls.

With this approach we aren’t “bailing out” anybody, just preventing the contagion until we can sort out the MBS, CDO, and CDS markets with tough restructurings. Those restructurings will essentially have to convert debt contracts to equity contracts, under some guise. Much of this restructuring might go forward with minimal government involvement.