So much for the Fed not trying to “bail out” the mess on Wall Street.

NEW YORK (Reuters) – Global markets plummeted on Monday after investment bank Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over and the Federal Reserve threw a life line to the battered financial industry.

As a deepening crisis took new, bigger victims, the U.S. Federal Reserve said for the first time it would accept stocks in exchange for cash loans and 10 of the world’s top banks agreed to establish a $70 billion emergency fund, with any one of them able to tap up to a third of that.

Once again, we see the government (and make no mistake about it, the Fed is part of the government) willing to accept worthless paper and make loans from it. Hey, Ben and Alan, the problem ain’t liquidity; it is the problem of massive malinvestments that MUST be liquidated. We cannot have a recovery until that happens.