Daisy chain.

It doesn’t get any better than this.

You sit down to write about the mundane corruption of our democracy, and the ease with which banks can announce on the front page of the New York Times that they are going to pull their political contributions from Democrats—who apparently are not treating them nicely—and the equal ease with which Republicans announce that they will go after those contributions, and treat the contributors with greater deference. Then you realize that that is not the pressing issue of the moment.

So you decide instead to write about the looming default of Greece on its debt, and the profound anger in Germany at waking up one morning to find that it has emerged as the defacto guarantor of not just Greece, but all of the overleveraged, profligate and unruly southern European nations that Germany tried so hard to hold under its thumb in centuries past. Indeed, the unraveling of the European Union—that great political institution created to contain the German colossus after the failure of the Maginot Line—is leaving German’s wondering how their aging nation has found itself on the hook for Greek bureaucrats who just this week marched in the streets to protest layoffs in the wake of Greek efforts to impose fiscal austerity.

But of course, the images of the righteous protests of Greeks marching in the streets, as though someone else is to blame for the overspending on the Olympics and pensions and every other matter, just foreshadows the pain that is looming across major state governments, who are just now coming to grips with the fact that the full force of the fiscal crisis is only now just about to land in the U.S., as Federal Impact Aid has been fully expended, and Republican and Democrat Governors alike are resorting to fiscal gimmickry and pension funding holidays as they struggle to avoid admitting the obvious: That if the states—and the Federal Government for that matter—are ever to return to real fiscal balance, they have to come to grips with the simple fact that they must spend less and/or take in more. And politicians, retirees and workers in many states will need to face the harsh reality that long-term pension obligations will never be fully met, and the sooner that they all come to grips with that fact, the more equitable the resolution will be.

Then, this depressing thought was sidelined by the first mention of the word quadrillion. And that seemed to trump thoughts of bank corruption, Greek bonds, German upset, state pension, and the rest of it.

Last night, I saw the $4 trillion Bailout ads on TV. And this morning, I received an email regarding the $25 trillion guarantee of financial derivatives by the Federal Reserve, sent to me not from some crackpot, but from a derivatives trader at Merrill Lynch. This email referenced a story—referring to names that will mean little to most people—about how the Depository Trust Company, the brokerage industry vehicle that handles all stock trades—$2 quadrillion annually—announced that “the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Warehouse for over the-counter credit derivatives.”

So what does this mean in English? Well, the piece argues that all credit default swaps, are now backstopped by the Fed. Because, as quoted from an Office of the Comptroller of the Currency letter, “Clearing is a form of extending credit, one of the main functions of banking institutions. A clearing agent substitutes its credit for that of its customers… and is liable to a clearinghouse for performance on all submitted contracts, and assumes, with respect to the exchange, clearinghouse, and counterparties, the risk of default.”

If there is a theme to all of this, it is that in the name of the security of the financial system, we are continuing to march down the path toward homogenization of all risk onto the books of the Federal Reserve and the U.S. Treasury. In our efforts to avoid cascading collapse in the early months of the fiscal crisis, the Fed and the Treasury merged failing investment, took over and posted collateral to avoid the failure of AIG, backed up all manner of bank obligations, swapped bad debt for cash on the books of the Fed, and took all manner of other arcane actions, all in the name of preserving the system from collapse.

But since things settled down, we have done nothing to ameliorate the massive problem of moral hazard, beyond very lame and totally unbelievable statements that banks “better not count on a bailout next time.” These statements are unbelievable exactly because every step taken so far has been to shore up and make stronger the abilities of the Fed to respond to future crises, and to have resources at its disposal to act with fewer constraints by Congress or the Executive.

Does the creation of a CDS clearinghouse within the Fed system constitute a federal guarantee of performance under those contracts? I don’t know, but every action taken so far constitutes a greater concentration of risk onto the books of the government, rather than actions that would lessen systemic risk and force risk-taking back onto the private market participants, where it belongs.

And there are no small number of viable suggestions that have been made over the past year for consideration.

· Reinstitute the separation of commercial banking and risk trading activities.

· Recognize that institution size and political influence exacerbate systemic risks.

· Reconsider the rationale, role and structure of deposit insurance.

· Reinstitute at-risk rules for trading and the partnership structure for investment banking and trading organizations.

· Eliminate collateralization provisions in derivatives contracts so that counterparties must consider and accept counterparty risk, and to prevent counterparty collateral claims from undermining senior debt holder rights.

· Regulate credit default swaps and other derivatives that undermine appropriate functioning of corporate finance and bankruptcy process.

Just to bring all of this full circle, the reason so many are rejected has to do with at least in part with the corruption of the political process referenced at the outset. Failure to chart a path that reinvigorates the private assumption of risk will surely lead us one of these days to be facing the question that many Germans are asking this morning, when the next, far bigger, crisis hits, and the U.S. Government no longer has the resources available to absorb everyone’s risks: How did we let this happen?