The news background is relatively benign this morning. Stock markets in Asia and Europe are stronger, after five days of relentless and at times violent selling. Credit markets are just as dysfunctional as ever, but not much worse.

There are several things to watch over the next several days: corporate earnings, global countermeasures to the crisis, and further aggressive actions by the Fed and Treasury.

The biggest weapon that the world has for combating the crisis is the balance sheet of the United States, and there were signs yesterday that the Treasury is starting to use it aggressively. That raises questions about who will be in charge of this when Henry Paulson leaves office in January.

It’s the start of third-quarter earnings reports in the United States, and so far results have been mixed. The Aluminum Company of America (Alcoa) gave a putrid report the other day, but yesterday IBM’s report wasn’t bad.

General Electric reports tomorrow, and that one will be interesting because about half of GE is actually a global financial business. Late last month, GE held an interim call in which they warned that results from GE Capital would be disappointing because of the credit market disruptions, and also because of weakness in US consumer finance.

All these reports contain clues to the most important aspect of the global financial crisis, which is what effect it will have on the actual consumer and industrial economy.

We’ve been lucky in our financial crises over the last few decades. Most of them have scared a lot of insiders, generated some arcane but scary headlines, and done not much else.

This time will be different. The weakness in housing prices has led to widespread insolvency within the financial industry, which in turn has sharply diminished the availability of credit. This situation has been simmering for more than a year, but three weeks ago it erupted into industrial economy in the form of a severe squeeze in short-term credit for businesses.

We’re very likely to find that the global economy slammed on the brakes hard, last month. This will show up in a small way in this quarter’s earnings reports, but the reports we’ll see in early January will really show the effects. Stock markets are already behaving as if the worst-case scenario will become a reality.

Yesterday’s big news was a cut in policy interest rates, coordinated across a set of the world’s central banks, including the Fed, the ECB, the Swiss National Bank, the Bank of Canada, the Bank of Japan, even the People’s Bank of China.

Global responses will continue, because this crisis is truly global. Some of the worst disorders in the financial industry are yet to come, and many will center in Europe. The last dominoes have yet to fall.

The thing to note about all this is that leadership for managing the crisis will need to come from the United States. Last weekend, there was a widely-watched meeting of finance ministers in Europe. They produced nothing but hot air, and that spooked markets mightily.

The response of US policy makers has inspired questions about whether the weapons in their arsenal are equal to the task, but no questions at all about whether they are acting aggressively enough.

As the management of the crisis becomes global, it will be up to leadership in the Fed and the Treasury to get everyone on the same page around the world and move in the same direction.

Key to any solution will be the balance sheet of the United States. Simply put, this is the ability of the Treasury to borrow enormous amounts of very stable capital at low interest rates from the rest of the world.

The $700 billion that Treasury is now authorized to spend on crisis remediation is exactly what I’m talking about. This is capital that can be piped from the world’s largest investors, including foreign central banks, onto the balance sheets of financial institutions.

I have to say that, although the current leadership of the Treasury and the Fed have come in for a lot of criticism, much of it justified, they’ve done a fine job of stepping up and meeting this crisis head-on.

They have made a lot of mistakes. In particular, there’s a good case that Lehman Brothers should not have been allowed to hit the ground with a thud, but rather should have been killed cleanly as Bear Stearns was. That might have avoided the whole acute solvency crisis we find ourselves in. But that’s a question that will be answered by future historians.

And everyone from President Bush to Secretary Paulson to the leadership in Congress did an abysmal job of explaining to the public what the TARP legislation was actually all about. They allowed everyone to immediately form the impression that $700 billion was being transferred from the pockets of poor and middle-class people right into the Swiss bank accounts of a raft of rich white men on Wall Street.

And then they did nothing whatsoever to counteract that impression. This episode is going to be the textbook case for how not to handle the public-relations aspects of a major crisis.

Ben Bernanke will be the Chairman of the Federal Reserve Board into 2010. That’s a good thing. But Hank Paulson will be leaving his job in January.

Who fills his shoes? Many on Wall Street, including myself, would like Paulson to stay in the job for a few more months to finish the work he started, and keep things going on an even keel.

But it’s no exaggeration to say that Paulson has few friends in Congress. He won’t be asked back. And one of the things they don’t like about him, his reliance on putting former associates from Goldman Sachs into key positions, is part of what’s keeping the crisis management steady.

We’re going to get a large new cast of characters at Treasury in January, like it or not. Who is Obama likely to put into the top job? Speculation has centered around New York Fed President Tim Geithner, former Treasury Secretary Larry Summers, and former Treasury Secretary Bob Rubin. Given a choice, my pick is Geithner.

For McCain’s part, he’s talking about a variety of CEOs, including Meg Whitman, formerly of eBay. None of those choices inspire me, but he also could give the nod to Geithner or Summers.

One crucial thing about the next several years is that economic policy must be run by people who are committed to free markets. This is true of the people running things now. We’ve created more socialism in the last six months than at nearly any other time in history except for the New Deal.

The extraordinary structures put in place to manage this crisis, including the conservatorship of Fannie Mae and Freddie Mac, must be unwound immediately after the crisis ends.

We’ll be watching whoever becomes President very closely to ensure that his economic policy team is fully committed to free-market capitalism and a rapid return to normal markets.

Keep in mind that whoever comes in to run Treasury, and the people that he or she brings with in, will be called upon to manage not just US economic policy, but also a historic global crisis. This is one of those times when the quality of the leadership we choose will make all the difference in the world.

To RedState’s cherished and valued readership: I wish all of you a peaceful and contemplative Yom Kippur.

-Francis Cianfrocca