With the whirlwind news cycle - it seems like 15 minutes of fame is all a whole topic is getting - I wanted to point out two islands of sanity.
First, the Fed just announced a program to buy unsecured short-term debt. That's the kind of debt that actually funds Main Street businesses. Economists with a history of being right, like Prof. Nouriel Roubini have been suggesting this type of move for more than a week.
I think that the Paulson Plan bailout is a waste of money and time. Glen Greenwald at Salon has written two articles detailing the public policy implications of buying insider toxic exotic debt instruments (that are often 3 levels removed from the actual asset being valued/hedged/bundled) see here and here. But, this is a good sign.
Finally, there seems to be some common sense being used. If credit is the problem, doing something about first level credit markets - not the remote derivatives - seems logical. This action also avoids the moral hazard of deciding who's toxic debt to buy and at what price (even impartial experts don't agree about pricing methodology).
The second ray of good news is that Bank of America is allowing some of its Countrywide sub-prime borrowers to renegotiate the terms of their loans. While this particular program is probably a result of both litigation against Countrywide's loan origination process and a desire for good publicity, it does have an effect. It points the way, it gives relief to qualified homeowners, and allows all of the good follow-on effects.
Mortgage renegotiation needs to be more systematic - not one by one, but across the board by mortgage date/type/originator. This preliminary report from February 2008 by the State Working Group of the Conference of State Bank Supervisiors has some data about efforts in this area.
More like these please.