In 1975, New York City had a financial collapse. Simply put, the city was spending more money than it was taking in, and to pay for the deficits, New York was selling capital improvement bonds in the market -- to pay for other bonds. Now, this is called securities fraud, but no one from NYC ever was indicted for this financial trickery.

When the fraud was exposed, there was a huge push to make the federal government buy NYC bonds or to do something to bail out the city. David Rockefeller went around the country trying to convince everyone -- anyone -- that if NY defaulted on its bonds, the entire world financial system would come tumbling down.

Well, NYC defaulted -- sort of. Although it technically was not called bankruptcy or even a default, the actual agreements permitted the city to settle with its creditors for less than timely payments, which is a de facto default.

Yet, NYC's troubles did not make the world end. Likewise, if the government were to say "no" to the holders of these near-worthless mortgage securities, it would not be the end of the world; the financial system would not crumble to dust. There would be a lot of belt-tightening, but that would be welcome after the orgy of credit expansion that has led to one malinvestment after another.

Unfortunately, that is not going to happen. Furthermore, the real issue with Congress and the president is not bailing out financial firms per se. No, the real issue is the nationalization of the financial system. Congress and the executive branch soon will have the kind of power of which despots could dream.

Economically, it will be a disaster, a much greater disaster than letting Fannie and Freddie and some banks melt down. But it will be a disaster.