Though they’ve been battered by losses related to the housing recession and mortgages gone bad, banks are still in relatively good shape — so far. Loan delinquencies are at about half the levels seen at the peak of the last big credit crunch in 1991, according to a recent research report by Morgan Keegan.

But those delinquencies are rising. With home prices falling, and billions of dollars of paper backed by mortgages at risk of default, the biggest unknown is tied to the million of loans scheduled to reset to higher rates that many homeowners will be unable to keep up with. So until the housing market shows some signs of stabilizing, it’s all but impossible to know how much more money will be lost from mortgage defaults.

“We won't even know what happens until they reset, first of all, later this year and in '09 or '10 — or even go to their 30-year length," said Wesbury. "The financial markets are pricing in all of these (defaults) for the next, two, three, five, 20 years right now. So, have we priced it all in or not?”

Fed officials are hoping to overcome the breakdown in confidence by making money cheap —and offering to lend to whoever need its.  In guaranteeing the credit line that JPMorgan used to back Bear Stearns obligations, the Fed crossed a line that has historically walled off the tightly regulated banking industry from the far more risky securities business.

Some Fed watchers say that targeting loans directly to the source of the problem helps get to a solution more quickly.

“If you look back 20 years or so, what the Fed would do is call up the commercial banks and say, ‘Now, be sure to lend money to all the investment banks,’” said former Fed Gov. Robert Heller. “And rather than doing it indirectly through the banks, which creates another problem because they take assets on to their own balance sheets, the Fed is short-circuiting the process and giving liquidity directly where it's needed the most.”

The worry is that the move may encourage investment firms to make riskier bets in the future — knowing that the Fed is ready to back up those bad bets to avoid wider financial calamity. But Heller says the process of rescuing Bear Stearns has already been painful enough to discourage such future bed bets.

“You cannot talk about a bailout of Bear Stearns,” he said.  “If you're a shareholder of Bear Stearns, you would have lost it all. You're walking away with 1 percent of your asset value.”

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