American International Group Inc. (AIG) got a $150 billion government rescue package – almost double the initial bailout deal of less than two months ago and the largest ever granted to a private U.S. company – as the ailing insurer continues to burn through its cash at an accelerating rate.

By all reasonable measures, we are already in a recession, says Shah Gilani. Deflation has become today’s number one threat. But massive government rescues mean another bout of inflation looms on the horizon. Shah says investors should look to short vulnerable stocks in 2009. But in 12-18 months, they should be prepared for a “generational opportunity” to make a fortune.

It’s panic time for U.S. legislators, regulators, banks and lenders. More than $24 billion worth of adjustable-rate mortgages (ARMs) are expected to “re-set” to higher interest rates in November – boosting the likelihood of further home foreclosures.

In the mid-80s Money Morning contributing editor Shah Gilani ran a hedge fund from the floor of the Chicago Board of Options Exchange Inc. As an independent market maker, he could trade in any pit on the floor. The most important lesson he learned there was how to play the crowd. It’s one of the four basic rules of contrarian investing.

“The commercial paper market is the thoroughfare where Wall Street merges into Main Street,” says former trader and hedge-fund manager Shah Gilani. The problem is the commercial paper market is dead. And the Fed can’t prop it up for ever. When the Fed’s commercial-paper buying scheme ends expect more bank failures.

The buzz on Capitol Hill is that Congress could pass an updated version of the bailout bill before the end of the week. But Shah Gilani in Money Morning says taxpayers are being “force-fed a political solution, instead of a sound economic market-based solution to a financial crisis.” He says the the bailout bill has eight key failings.

Neither Hank Paulson’s plan nor any of the additions by Congress and lobbyists will resolve the credit crisis, says Shah Gilani in Money Morning. That’s because “the key culprits are the structured financial products on the balance sheets of banks, dead investment banks, insurance companies, hedge funds and all manner of other duped and unsuspecting investor entities worldwide, as well as the proliferation of the unregulated $62 trillion credit default swaps market.” Shah says 15 simple steps would end the credit crisis for good…

Former professional trader and hedge-fund manager Shah Gilani says the very complexity of the global financial system brought us to the brink of a total meltdown. Asset-backed securities such as structured collateralized debt obligations, credit default swaps and the horrific offspring of the two, credit default swaps on structured collateralized debt obligations, are the main culprits, says Shah:

There’s nothing fundamentally wrong with the core insurance business units of AIG (NYSE:AIG). The company’s downfall was an accumulation of misplaced bets on credit default swaps.