Your Sunday required reading this week comes from Professor Lasse Heje Pederson of NYU, courtesy of VoxEU, "Understanding Liquidity Risk and the Current Crisis."  Jumping straight to the conclusions:

If the problem is a liquidity spiral, we must improve the funding liquidity of the main players in the market, namely the banks. Hence, banks must be recapitalised by raising new capital, diluting old equity, possibly reducing face value of old debt. This can be done with quick resolution bankruptcy for institutions with systemic risk, i.e. those causing liquidity spirals.

Further, we must improve funding markets and trust by broadening bank guarantees, opening the Fed's discount window broadly (giving collateralised funding with reasonable margins), and ensuring the Commercial Paper market function. Further, risk management must acknowledge systemic risk due to liquidity spirals and the regulations must consider the system as a whole, as opposed to each institution in isolation.

Apparently, the Fed is the place to be on the weekend in the late summer.  Released just two hours ago:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies. 

Pete started this. Let me add a few quick thoughts.

I'm a big CNBC fan, but the way they covered the Treasury secretary's formal announcement yesterday of a financial services reform plan after a weekend of informal releases was close to yellow journalism. Not only was there little new to report by the time Secretary Paulson stepped up the microphone, by then it was also clear that this was not going to be adopted this year, or perhaps ever.

First, you had a major proposal by a lame duck administration with very low approval ratings facing a hostile House and Senate controlled by a different political party.

Second, you had a very contententious plan that even its supporters agree won't do much to deal with the current situation before Election Day.