What Did They Know and When Did They Know It

I came across this speech given by Frederic Mishkin, formerly a member of the Federal Reserve. He spoke in February of this year (the Dow was still above 12000.) He reviews a scholarly paper about the mortgage crisis. The authors of the paper argued that because banks are leverage 10 to 1, mortgage loses will lead to forced selling which will lead to the loss of credit availability. They posit that for every $1 loss by a bank, there will be $10 less to lend.

This raises the question, if the Fed knew this was a serious possibility why wasn't a plan devised at that time to deal with this potential crisis? Why did it seem like Bernanke and Paulson were pulling plans out of dark and smelly places in early September when they had many months to think through their options?

Then again, Mishkin also wrote this article about the strength of Iceland's economy.