"When the Fed fails"

No, I'm not going to write a post on this topic.
I don't know enough.

It just suggests itself as a worthy topic for someone who knows more than I.

What happens when the Fed fails?

Seems a not altogether unlikely occurence, what with the U.S. stepping in to guarantee Fannie, Freddie, & AIG. When the basic insolvency of these institutions becomes obvious, what then?

Folks who know better than I have made the distinction between a crisis of liquidity and a crisis of solvency. A crisis of liquidity: you have the assets to pay your bills, you just can't get the money together today. A crisis of solvency: your debts exceed your assets - you're busted... and you take your creditors down with you (at least, those creditors who were banking on you to make good on your obligations).

The Fed seems to be betting heavily that the basic issue is one of liquidity, and is making money available to folks today to pay their debts, with the understanding that there are real assets on which to draw to make good these loans.

What if that's not the case?

Can the Fed fail?

If so, then what???

Again - my knowledge is insufficient to address this question.