I think the government will probably try to go the middle road: Basically print enough money to partially offset the credit contraction. Like you say, it won’t be enough to keep housing or the stock market elevated, but other prices will still rise. Necessities will rise, and gold and agricultural commodities might rise the most. By being in the middle of the two evils, they upset the least voters. Houses drop 30% and gasoline rises 30%? Wouldn’t you try to do the same if you were Bernanke?
