Paul Krugman writes:
When is not a bailout a bailout - Paul Krugman - Op-Ed Columnist - New York Times Blog: When is not a bailout a bailout So the word seems to be that Lehman will be liquidated — hey, no more taxpayer takeover of risk, no more moral hazard; but to cushion the markets against the shock, the Fed will start accepting lower-quality assets, such as equities, as collateral for its credit lines — hence, more taxpayer takeover of risk, and more moral hazard. Oh, kay. By the way, I’m not sure this was the wrong thing to do. But it drives home the essential craziness of the situation.
It seems to me that this is the right thing to do--as long as the Fed can borrow from the Treasury, that is, so that it can conduct its own operations on a properly-large scale. The Fed's portfolio is large. It is not infinite.