The public is terrified that banks are going to fail, which is why the demand for safe havens is exploding: gold is up over $100/oz. in the past few days, and the interest rate on 3-mo. T-bills has dropped to zero (actually, 0.1% according to Bloomberg as I write this). And of course stocks are down to new lows, and credit spreads are sharply wider. This now approaches a classic crisis of confidence in the banking system.
A problem like this can't be solved by lowering the Federal funds rate (but you can't rule out the possibility that the Fed would be compelled to do just that if things get worse). For now, the government is going to have to take some action which shores up confidence directly. And they are probably going to have to socialize a good portion of the real estate-related losses that have not already been written off. Raising the FDIC deposit insurance limit would help, as would establishing another RTC, as suggested by Brady, Ludwig and Volcker in today's WSJ. And the Fed will have to "lend freely" as recommended long ago by Walter Bagehot.
More disturbing is the increasing (though still relatively small) likelihood that some of these losses will be absorbed via the printing press. Higher inflation is a back-door way of dealing with too much debt. That's the Argentine recipe for getting out of a debt mess: run the printing presses and use the money to pay off debt holders. Higher inflation not only reduces the burden of the debt but in this case it might also slow or stop the decline in housing prices, and that would short-circuit this crisis directly. The risk of higher inflation would help explain the sudden rush to gold (though I think it's mainly a bank panic for now). No one has proposed an Argentine-style solution yet, and even if they did it would most likely be disguised amidst a blizzard of other measures, loans, and/or bailouts.
So, the solution to this problem will probably involve 1) the socialization of remaining real estate losses, and 2) more inflation than most people expect. On this latter point, I would note that the TIPS market is assuming that inflation is set to plunge from its current 5% level, averaging a mere 1.5% over the next five years. If you think inflation could be higher than that (which seems likely to me), then TIPS should be your investment of choice if you're looking for a safe haven.