I agree that the solution could work, but the problem is that the liabilities HAVE grown, and will ocntinue to grow massively, given that they included tons of bets that a lot of stable institutions would not fail - several already have, and more could follow them).

The asset side of the mess could be plugged by Fed injections, but the liabilities side cannot (and yet this is what is being done via AIG).

Whatthis means, though, is that lots of people (like Paulson) are making outrageously large profits from having bet on supposedly rare failure events - and this money is being created for them by the Fed.

In the long run, we're all dead. John Maynard Keynes