The housing bubble has not caused a recession. I have no reason to believe it alone could cause another Great Depression. What could cause a depression is pumping more credit down the sinkhole. You do not recover from a speculative bubble by expanding credit. That’s like trying to extinguish a fire by throwing more fire on it.
It won't, but demanding that Wall Street take another $700 billion hit, even in the short term, on top of the $500 billion they already ate over the last year, will. It won't cover the (quotational) losses, either. We still eat those.
When Lehman failed it brought down larger banks within days. Each of those was doing the same to the next couple. A run had already started on money funds, at a rate of $160 billion per day. Nobody has that kind of liquidity. Nobody. The Fed either makes it or every bank fails.
And that would (1) still leave us with the loss, wearing out "taxpayers funding the FDIC" hat. Or we could repudiate that too, and then (2) we still take the loss, while wearing our "depositer" hat.
This isn't about housing any more. It is about whether the beggar thy neighbor to heck with them all attitudes so far deployed to deal with the housing bubble bursting, are allowed to destroy the US financial system, or not.
But we take the hit, regardless. Nobody else has it. There is no blood in stones.