The credit bubble did not start recently, it has been going on for more than 15 years.  The advent of Hedge Funds and market to market accounting created an explosive combination that took advantage of incompetent regulators that had both hands tied behind their back and were blindfolded. 

Bernanke and Paulsons' fear mongering was treasonous and they should be summarily dismissed then executed.  Their statements constitute a direct attack against the economy of the United States and risks the confidence of our global creditors.  Their words potentially were/are more dangerous than planes into buildings. 

Who is going to get hurt by doing nothing and letting the economy contract to its natural properly leveraged size?

Hedge Funds and their creditors and investors.  First, the hedge fund phenomena where earnings were magic and risk was mastered by huge borrowings is now discovering:

• risk and reward are related
• leverage works in both directions
• managers can be wrong
• they lose credit quickly
• they are not a different asset class

Wall Street will do less, need less.  The middle people who lied to the borrowers and then lied to the investors will find that they are no longer required part of the economy and that the high speed internet just replaced them.

• already lost Bear, Lehman, Merrill, Morgan Stanley and Goldman
• the Putnams, Fidelity and other large mutual fund complexes along with Ameritrade, Charles Schwab and other investor orientated brokerage firms will thrive with th demise of hedge funds

Main Street will not go unscathed because the economy is really about 15 to 20 percent to large given the excessive leverage in the system.  The hardest decision here will be how to take the contraction?  Slow and painful or quick and really painful.  In either case it will not be done in six months or a year.  This kind of economic contraction will eventually turn into the discovery of a new way of living and it will take five or more years. 

• Unemployment is going to go much higher
• more homes will be lost to foreclosure
• elders will not find the public wanting to pay for viagra or life saving medications
• value for expense will equate again
• the economic contraction will cause civil strife and increased violence in locations where the land cannot sustain the population

Experts (LOL) like Paulson and Bernanke knew this in advance and instead of deleverging the system and contracting the economy in a planned and structured way, they continue figthing for the excess.  I seriously doubt they believe that the $700 Billion will stop the inevitable, but it will keep the boat floating long enough to get their life jackets on and their butts off and away from the sinking ship.