US financial officials are annoyed at the sneers of their European counterparts. It all goes together with the Euros' snickering over their boxy suits, clunky shoes, cringe-inducing political campaigns, and massive asset write-offs. The Americans can live with being considered violent and soullessly efficient; being tagged as uncool bumblers is painful.

As the US policy tribe point out, not incorrectly, at least they're bumbling towards recognising problems and coming up with solutions, albeit at the last minute. The smoother and better tailored Europeans, they hint resentfully, have much more serious problems with their institutions, which they lack the existing authority or political consensus to solve.

At the moment, for example, the Washington policy people and the Wall Streeters buzzing around them are trying to figure out how to get yet more liquidity for housing-related paper.

The Wall Streeters seem to assume the next step will be the creation of something like the Resolution Trust Corporation, which was established by the government in 1989 to liquidate the real-estate-heavy assets of failed savings banks.

Or, as David Rosenberg of Merrill Lynch told the firm's clients last week: "The outright purchase [by government agencies] of illiquid mortgage-backed securities is probably required, and could employ government-backed fiscal action . . . The Federal Reserve itself could buy some of those securities, but the Fed alone cannot unclog the congestion in the capital markets, in our opinion."

That is not what the Fed, or the Feds, want to hear. The Fed is already uneasy about the scale of its on-balance-sheet exposure to mortgage-backed paper. The limited liability company shell set up for the Bear Stearns assets cannot offer real insulation from credit exposure.

Eventually, too, the monetary policy management issues become significant if greater demands are made on the Fed's balance sheet. As for the other federal agencies - those subject to the "fiscal action" to which Mr Rosenberg refers - they have their own problems. Paying for securities purchases with money run through the federal budget is very unattractive, particularly in an election year. The Republicans don't believe in it and the Democrats don't want to give the Republicans a target.

Here the ancient bureaucratic trick of three choices comes into play. The "policy options" presented by the stonefaced civil servant-expert to the political master are always: 1) one that will cause the end of life on earth as we know it; 2) an alternative that will mean the end of your political career; 3) another possibility that we could "staff out" if you're interested.

In the case of illiquid housing assets, the end-of-life-on-earth is an inflationary expansion of the Fed's balance sheet.

The career-ender is the direct use of taxpayer money.

The third way is the use of government guarantees to induce the investment of private capital.

A friend of mine at the upper level of a federally-connected housing institution says: "The key here is to unlock the markets. By removing credit risk [through some form of expanded guarantee programme for housing-related securities], you could induce institutions to bring back in the immense amounts of cash that are on the sidelines. That would have a contagious effect - a good one."

A government guarantee would do a lot for the pricing of "investment grade" paper. (Given the fallen state of ratings agencies, the words "investment" and "grade" are rightly now put in quotation marks.)

That solves part of the problem of savage marks-to-market. There are, though, actual economic losses, caused by defaults and inadequate recoveries, that will be appearing on bank and dealer balance sheets. How are these reduced by such a programme?

They wouldn't be, not without the guarantee's being called on, which is not the idea. But as liquidity returned, assuming the guarantee initiative worked, some of the mark-to-market losses would be reversed and loss reserves recaptured. Those recaptured mark-to-market reserves could be used to offset much of the ultimate realised losses due to defaults and overestimated recoveries.

Magic, right? The problem, politically, would come with the word "guarantee". Why, many will ask, did we not get a guarantee? So instead you call it "insurance", which we all know about - you pay a premium for it. Is the premium adequate to cover future losses? Well, we'll see, probably during the term of one's successor.

There are some other tweaks that would have to come. Tax policy has to be altered to allow for deductions from income for aggressive reserving for anticipated losses, rather than just known and recognised losses. That is much less visible than direct government capital provision, but it performs much the same function.

This still doesn't solve the problem of the banks' and dealers' under-capitalisation in the new, on-balance-sheet world.

Part of the "progressive" solution to the problems of the US financial system is a rise in capital requirements. For some reason, the proponents don't see that this will lead to a severe credit contraction. The problem of capital adequacy remains, even after unsticking the market for housing paper with insurance, guarantees, or whatever you call it.

johndizard@hotmail.com