The bailout doesn’t address massive bad debt.

"Neither a borrower nor a lender be," we read in Shakespeare, but, then, nobody ever suggested he was a good mentor on modern economics. A better insight comes from Ben Franklin: "A penny saved is twopence dear"—save your money and you can double it by lending it out at interest.

The premise, or maybe the hope, behind the bailout plan and all the other interventions in the financial markets is that we are witnessing a seizing-up of the credit markets as lenders around the world pull their money out of anything that could contain any degree of risk, a "flight to safety." This has happened before, notably in the Russian default of 1998 that took down much of the hedge-fund industry.

Something like that is clearly happening now—a week ago, the interest on three-month Treasury bills fell to almost zero as world markets decided that being certain that money didn't disappear (hey, at least no one expects a U.S.-government default) was more important than high returns. The thinking behind the bailout is that if the government can backstop the wave of failures and guarantee bad debts to stop the dominoes toppling, the credit market will reopen.

One of the scary things about the current crisis, however, is that the flight to safety may not just be a short-term gyration of the markets. The world credit markets are saying, in certain terms, that the risks of many loans—and especially the real-estate loans that set this in motion—have been grossly underestimated. For this they have compelling evidence, such as the catastrophic failure of the ratings agencies, whose habitual grade inflation turned the AAA rating into a gentleman's C.

The flight to safety has been extreme, but it is also rational. Time after time, bondholders, as well as the shareholders of financial institutions, have seen the rug pulled out from under them just as they thought they'd staggered up. In the last months, as each successive bank and brokerage announced a new multibillion-dollar write-down, the shares rose on the theory that "now it's over" and all the losses had been accounted for. And just about every time, it turned out that there was still more to come. The bank bears have eventually been proved right-except that they could have been more bearish.

Stephen Roach, the chief of Morgan Stanley Asia (and for a long time one of the more prescient and pessimistic observers of the economic scene) warned in the New York Times last spring that there was no monetary-policy solution to a problem of low savings and excessive debt—whatever the government does to revive the credit markets, the underlying problem will still be there. With a housing market spiraling downward, incomes stagnating, and consumer debt staying put, the fact remains that much of the banking business teeters on a pile of debt that is unlikely to be repaid (and on derivatives linked to that same debt).