Where do I stand on all of this?
On the size of the problem, I'm with Richard Green, Brad DeLong, and Paul Krugman. A rescue may be needed, but it doesn't look like we are facing an insurmountable problem that endangers the broader economy.
As for what to do going forward, increased capitalization is one step, and I think Robert Waldmann's idea of making sure owners have a substantial stake in the companies fortunes is a good one even though this is a case where risks have been regulated fairly well.
On monetary authorities putting public money at risk, I'm less worried than Jim Hamilton about the strict separation of authority in these bailouts. As I've argued before (without convincing many people), even if the Fed doesn't take on any risky assets at all, it already has the power to impact the federal budget and cost taxpayers money through its decisions (e.g. if there is no action at all by policymakers in terms of a bailout, so no public money is put at risk in the sense above, or the wrong action and the economy tanks, then the resulting crash in GDP would cause social insurance payments to go up and tax payments to fall increasing the budget deficit and hence the future tax bill).
In addition, congressional involvement can impede or block the quick reaction we need to deal with a financial crisis. Thus, I quite agree that this is, ultimately, a congressional matter to be decided by elected officials. But perhaps congress can extend some type of automatic authority that allows monetary authorities to step in up to a limit, and then require approval for anything beyond the preset limit. That would give monetary authorities the flexibility they need to deal rapidly and flexibly with most situations without putting more than the preset amount of public funds at stake.
Finally, like almost everyone else, I don't think we can allow these firms to fail.
