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Telegraph - Sooner Fed bail-outs than the 1930s revisited, by Ambrose Evans-Pritchard

Most would rather relish the delicious moments of Schadenfreude as the bailiff’s gavel falls on their Gulfstream IVs.

Yet we must forbear. It was such sentiments that turned the 1930 recession into a slump. “Liquidationists” prevailed: they insisted with Puritan zeal - or malice - that speculators should be driven to the wall amid a cathartic purge of the Roaring Twenties.

Among them were top bureaucrats at the US Federal Reserve and some of Europe’s central banks. The consequence was the Brüning deflation in Germany, ushering in the Nazis. Democracies snapped across half of Europe. If it had not been for the towering figure of Franklin Roosevelt, America might have splintered into a bedlam of Prairie populists, Coughlan Fascists and Huey Long extremism.

There, you see? So next time somebody says something mean about Paris Hilton, you just tell him that he’s a dirty fascist trying to tear down the Democracies of Europe.

We should be thankful that the man now heading the US Federal Reserve - Ben Bernanke - spent his early career immersed in the details of that catastrophe. He has written books showing how a credit crunch can set off a vicious downward spiral, and do so with lightning speed. You do not mess around in such circumstances.

The “liquidationists” accuse Mr Bernanke of taking a dangerous gamble with inflation by slashing rates from 5.25 per cent to 2.25 per cent in six months, culminating in a trenchant three-quarter point cut Tuesday. They accuse him of “moral hazard” for invoking a Depression-era clause permitting the Fed to take on $30 billion of direct credit risk left by the wreckage of the US broker Bear Stearns.

They are right, in a sense. This is probably the start of a massive taxpayers’ rescue of the banking system. It stinks. But imagine if Mr Bernanke had listened to such advice as Bear Stearns faced collapse. …

It is America’s fifth biggest investment bank. It has $13,400 billion of derivative positions, and has underwritten $491 billion in options contracts. Topple this domino at your peril. It risks a chain of cross-defaults through the entire “shadow banking system”, that vast untested nexus of paper commitments.

Bear Stearns had a liquidity cushion of $17 billion early last week. It vanished in two days. This was a run on a bank by New York insiders. It would not have stopped there. If the Fed had not taken emergency action on Sunday night, wolf packs would have fallen on Lehman Brothers (even bigger) with equal ferocity this week. The crisis threatened to snowball out of control.

America is not facing “recession-as-usual”. It is in the grip of a property crash. House prices have fallen by 10 per cent so far; Goldman Sachs fears they may fall by 30 per cent in the end. The sub-prime mortgage industry has already disintegrated. Some 241 lenders have gone bust, or shut their doors.

The crisis has since spread to prime mortgages. Fannie Mae and Freddie Mac - the fortress agencies that guarantee 60 per cent of America’s $11 trillion mortgage market - began to crumble last week. Even bodies standing at the top of the credit system are no longer deemed safe. As Barclays Capital put it, this was a “tsunami event”.

Or in the words of City veteran David Buik at Cantor Fitzgerald: “No one in living memory has ever seen a banking crisis like this. I am older than God, and the outlook has never looked as bleak.”

Damn. That’s a good quote.

So, at any rate, something to sooth the worries of RC2 and Lileks.