Greenspan a few years ago, rising prices in general and stagnant wages. If we wanted to get technical a first stab might be f (i, cpi, w) = default rate where i = change in interest rate, cpi = actual inflation rate, and w = % change in wages for a certain term and type of mortgage.

So long as i and cpi were rising faster than w the default rate would, I assume, rise.

This, it seems to me, presents policy makers, having opted to guarantee some $5.3T of mortgages, with a very difficult scenario given the effect wage arbitrage has had on restraining US incomes. Keeping inflation down might require higher interest rates, which, assuming stagnant wages, might actually raise the default rate.

Rising defaults, by virtue of the need to guarantee, increases the fiscal deficit which will eventually push rates higher still, perhaps pushing more mortgages into default and the cycle begins again.

The key, it seems to me, is keeping inflation down. If oil prices continue their climb (despite the recent sharp decline oil prices are still up 35-40% y/y), and interest rate increases are needed, the cost of this bail-out could easily be in the 100s of billions with a trillion not out of the question.

An alternative method of keeping a lid of inflation is a strong US$, which, it seems to me, has been a focus of recent Central Bank activity.

If the powers that be can keep the US$ stable without igniting a more globalized inflation (which, I suspect, will prove quite difficult) the effects of this bail-out might not be catastrophic.

If, however, the US$ starts to fall and oil, and other prices begin to rise again...well let's just call that US$ doomsday.

On that note, have you read the news about Hurricane Ike?