US$700bn. A lot of money. As Jeff Jarvis says, that’s a whole lot of OLPC’s or college allowances.

Only one problem. The USA doesn’t have $700b. What it has is outstanding IOUs for ~$10.5t, and the credibility to borrow another ~$1t without anyone really thinking too hard about it.*

But if their entire investment banking sector and half their retail banking sector collapses through undercapitalization/overleveraging as a result of ratings downgrades due to the collapse of their credit default swap counterparties in a great big game of financial dominoes, that credibility might end up somewhat…strained.

As it turns out, the ~$70t CDS game is a global phenomena, so the collapse of American banks has the potential to indirectly cause the collapse of many other banks around the world, and since, quite frankly, I quite like being able to buy books from Amazon and cheap Chinese-made electronic gadgets (and on a more serious note, global economic depressions kill people, m’kay?), I’m really hoping the US Congress has it’s shit together this week.

On the other hand I tend to agree with Paul that it would be good if the US Taxpayers got some upside from bailing out their wayward Ibankers, although I fear that they really might not have enough time to work out the details. Perhaps a convertible bridge loan facility with similar conditions to the AIG bailout might be a suitable alternative to simply overpaying for distressed MBS to help the banks meet their Basel II obligations and hoping no-one complains too much about it.

* They’d better not think too hard about it, or they might remember the US Govt is currently on the hook for ~ $50t worth of unfunded Medicare & Social Security Obligations, and then start talking about a ratings downgrade on US Sovereign Debt, and frankly I’m not quite sure what happens after that.

Disclaimer: IANAB. No need to take any of this stuff seriously. I’m sure they’ll work it all out. But, you’d have to agree, interesting times.