It’s not really like that Laurie.

The issue is derivatives. Nobody knows what these complex instruments are valued at. The firms gambled with orders of magnitude more than they were worth and when housing went down they couldn’t untangle the investment instruments to see which ones paid and which ones don’t. The result is nobody wants to buy or extend credit.

The RT type solution (like savings and loans) will cordon off all of the bad investments—under government (read our) ownership so the firms can start to do business again. It’s probably the best of a bad set of solutions.

More regulation works for a while—as it did with the derivatives crisis of the early 90s until the next exotic trading instrument is developed that circumvents regulations. It’s necessary now.

What this really means is that the high paying jobs on Wall Street are gone. And they’re unlikely to come back for a long time.

This plan will be successful provided that a) the positions are illiquid rather than insolvent and the bond issues come back (likely) b) all of the radioactive issues can be cordoned off tightly and c) they provide a way to refinance many of the exotic mortgages and overvalued mortgages at lower principles for home owners in trouble (a hit the banks don’t want to take but congress is likely to enforce as part of the deal if the Democrats have their way).

With those three elements it could work—and it punishes the bank a bit for bundling in a way that deliberately obfuscated value and it made it impossible to unwind. It’s like trying to look into a black box to see which ones are good and bad—you just can’t see from the outside which individual ones are healthy.

The bottom line—Obama has Rubin, Sumers and Volcker to provide a plan to fix this. McCain has Feldstein and Carly Fiorina. That (and his savings and loan exposure) doesn’t give me confidence. Obama rates better on the economy because Democrats do manage it better (in fact and statistically). McCain’s involvement with the S&L debacle is a point against him as this issue roars to the front.

We’ll see—but this dominant issues is a challenge for him—and I (for one) would really, really like to see Rubin and Volcker have outsized influence here and an administration with a strong focus on the deficit and adjusting mortgage principles lower to provide fixed 30 year terms under the jumbo limits without PMI. Those two things would do more to fix the economy than all the posturing under the sun. And it would be possible given the government ownership of those loans.

Drilling is nothing now. Oil is headed for $80 a barrel without a single drop of newly drilled oil hitting the supply. Demand drops, equities look safer, the dollar strengthens a bit, speculators flee oil, and poof. Back to $80. It'll be an issue again--but not by November.