Yesterday, traders sent the Dow down a record 777 points. Today, the mood is more upbeat. The Dow is up 363 points. Traders clearly still want to believe the government can still help sort out Wall Street’s problems.

Justice Litle isn’t fully sold on the bailout. But he says it isn’t an option to let Mr. Market sort himself out this time: the US is too leveraged to follow Andrew Mellon’s “liquidationist” approach during the Great Depression.

That’s why the feds will do whatever it takes to prop up the system… and run the dollar into the ground. And that’s why you should buy gold now.

Even with a congressional compromise having been reached, the $700 billion credit-crisis bailout plan will remain the headline story this week as analysts monitor whether the deal is viewed as a good one, or is ultimately regarded as a flawed deal that can only do damage to the U.S. economy over the long haul.

Having savaged the U.S. financial sector since it surfaced in the summer of 2007, the credit crisis evolved into a crisis of confidence - which has manifested itself as a liquidity crisis. And that liquidity crisis is no longer confined to the financial sector. It’s spilled over into the energy sector, as well.

– The Fed, desperate to relieve the panic that has gripped the credit markets, has almost quadrupled the amount of dollars central banks can auction around the world to $247 billion.

– According to Bloomberg: “The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ‘to address the continued elevated pressures in U.S. dollar short-term funding markets.’ The Bank of England, the Bank of Canada and the Swiss National Bank also participated.”

– This flood of cash seems to have cheered Wall Street. “US stock futures pointed to a stronger start. S&P 500 futures rose 16 points to 1,178.90 and Nasdaq 100 futures improved 21.25 points to 1,668.25. Dow industrial futures rose 96 points,” reports MarketWatch.

–New York Mayor Michael Bloomberg, however, sent shivers up the spine of investors. He warned that a “next wave” of the crisis could come as foreign investors stop buying US debt.”It’s not clear who’s going to be buying our debt,” he said. “It may very well be that the next wave is going to come back and bite us.”

– Two financial giants are on the block. Morgan Stanley (NYSE:MS) is in merger talks with Wachovia (NYSE:WB), the troubled regional lender. Morgan Stanly is also “exploring other potential deals in an effort to avoid becoming the next victim of the credit crunch […] and is in close contact with a leading shareholder, China Investment Corporation, which owns a 9.9 per cent stake,” according to the FT. WaMu (NYSE:WM), the country’s largest savings and load bank, which saw its credit rating slashed to junk by Standard and Poor’s, is also looking to sell itself and has hired Goldman to run an auction, according to the paper.

– No end in sight, says the WSJ:

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem — troubled subprime mortgages — in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There’s also a growing sense of wariness about the health of trading partners.

– Gold prices exploded yesterday as investors sought safety from the mayhem on Wall Street. The metal posted the biggest one-day gain ever in dollar terms. This from AP:

Gold for December delivery rose as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session. That was the biggest one-day price jump ever; gold’s previous single-day record was a $64 gain on Jan. 29, 1980. In percentage terms, it was gold’s largest one-day advance since 1999.

– As gold soared, white-knuckled panic has gripped the global credit markets. Yesterday saw “a flight to safety of the kind not seen since the second world war,” reports the FT. According to the paper, lending between banks “in effect, stopped.”   While yields on short-term US Treasuries “hit their lowest level since the London Blitz.”

– This is how The Big Picture blogger Barry Ritholz explained the difference between AIG, Lehman Brothers and Bear Stearns to researches on The Daily Show:

Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.

Bear Stearns is the little pyro — the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.

AIG is the kid who accidentally stumbled into a bio-tech warfare lab . . . finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets.

– Dan Denning, editor of The Daily Reckoning Australia, has another view on the matter. Here’s Dan on why the Fed bailed out AIG and not Lehman Brothers, as quoted in Addison Wiggan’s and Ian Mathias’s 5 Min Forecast:

One answer is that most of AIG’s customers are overseas. Not only would a bankruptcy trigger chaos is the CDS market, but many foreign customers insured by AIG would be in doubt about the value of their normal insurance policies. Just like with Fannie and Freddie, foreign creditors may have again forced the hand of the Treasury to use American taxpayer dollars to guarantee the value of their financial investments in the U.S.

Lehman Brothers (NYSE: LEH) has a lot to answer for… No sooner had I wrapped up this edition of “Sector Watch” than the company declared bankruptcy, thus forcing me into a swift re-write! So much for my plan to go fishing yesterday…