As the Dow continues to plummet and credit markets are turning blue from the strangulation that started with the mortage meltdown, there are two main questions being asked on Wall Street now. The first is, Which investment bank will be next? The second is, Will the Fed be able to handle the effective nationalization of AIG, on top of Fannie Mae, Freddie Mac and the $30 billion of Bear Stearns securities it took responsibility for in March?

The optimists say the Fed will just print more money if it needs to– and to that end, the Treasury department has said they’ll provide the Fed a temporary Supplementary Finance Program by auctioning an extra $40 billion worth of Treasury Bills. They also say that this “witch hunt’’ to bring down another firm is the result of panic and fear.

The realists know otherwise: the Fed has backed itself into a corner. Sure, it’s made a distinction in the process– the bailout that Bear Stearns received, when assumptions were that the bloodletting on Wall Street could be contained, will not be extended to other investment banks. Lehman Brothers felt that wrath and was forced to declare bankruptcy. That Barclay’s may buy its old Capital Markets business only adds salt to Lehman’s wounds.

But the Fed will take on the risk of housing agencies like Fannie Mae and Freddie Mac. And it will assume the largest stake in a public company in U.S. history, through the $85 billion acquisition of AIG. The AIG move, of course, goes well beyond the job description of the Fed. They are supposed to regulate and oversee the banking industry, not the insurance industry.

In the process, what the Fed has really done is turn itself from a lender of last resort to a hedge fund of last resort.

The other truth that realists know is that the Fed, by allowing the lightning-quick acquisition of Merrill Lynch by Bank of America without any pre-conditions or regulatory strings, will now green light other acquisitions of investment banks by commercial banks, if only to avoid having to deal with the situation itself. That’s why earlier this week Goldman Sachs stock closed down approximately 10 percent, and Morgan Stanley, about 25 percent. The bet is that these firms, which are true investment houses possessing no consumer deposits (or “real money”) in reserve, will see continued deterioration as their competitors disappear.

If the markets were in a better state, the bet would be that Goldman Sachs would zoom forward with two of its chief competitors out of the way. But that’s not happening right now. Given the fragile state of Wall Street, corporate customers aren’t in a rush to switch their most lucrative business elsewhere and pull the trigger.

Companies would rather wait it out. Credit is tight, reserves are non-existent and Wall Street is in survival mode– that’s not a recipe for new deals. Morgan Stanley is in a similar boat, but one likely to sink faster, as it’s usually considered a “poorer cousin” of the prestigious Goldman.

The end result of either of these companies merging into a commercial bank would be the polar opposite solution of what the Fed, Treasury and federal government should be seeking. The problem with Wall Street is that overleveraged, risk-deluged, non-transparent, barely regulated companies took their speculation to the nth degree. Coming out of the crisis situation with a bunch of larger, even more obtuse institutions would only exacerbate and prolong the precarious position of the U.S. financial markets, and by extension, the personal economies of its citizens.

Unfortunately, the fact that this is occurring during a period of intense campaigning means that these dangerous outcomes are very likely, while a total overhaul of Wall Street will not be on, or even remotely near, the table. We are in the midst of financial destruction that, because of its sheer size, could eclipse that of the Great Depression. Asking the markets to sort themselves out will only prolong the agony. Decisive regulation could curtail it, as well as restore international and domestic confidence. Yet it seems neither John McCain nor Barack Obama can do more than point fingers and suggest anything other than a total overhaul of our system. It’s too bad. In shades of FDR, now would be the ideal time.

NOMI PRINS is a writer at Mother Jones and a former Bear Stearns analyst.