One of the most accurate forecasts predicting the severity of the credit crisis over the last 13 months lies with Merrill Lynch’s chief investment strategist, Richard Bernstein. I’ve followed his warnings since 2006 about housing and his track record is pretty stellar. Bernstein is still pretty bearish and believes the next phase of the credit crunch is spreading to consumer loans as the economy continues to struggle.

On September 12, Bernstein posed that the only way to stem the ongoing credit squeeze was to legislate a Resolution Trust Corporation (RTC) bailout of troubled financial companies in the United States. Former Fed boss Alan Greenspan served as a board member on the RTC back in 1989 following a series of massive failures tied to the Savings & Loans crisis. Greenspan also advocates similar policy action.

In today’s dollars the cost of RTC bailout runs around $370 billion dollars. Worldwide, the total sum of all financial sector write-downs is $530 billion dollars through July.

According to Bernstein, “The catalyst for the sustained out-performance of financials is likely to be when the government forms an entity specifically designed to facilitate the consolidation of the financial sector – like the RTC during the 1989-1991 period.”

The government’s actions have amounted to attempts to tackle crises at financial institutions as one-off incidents, rather than tackling the broader systemic challenge.

We all might be better off if the government structured a bail-out fund once and for all instead of isolating each crisis separately as they appear. That’s been the trend since March when the Fed organized a bail-out of Bear Stearns and engineered a sale to J.P. Morgan Chase. No doubt, other banks will fail before this credit cycle eases.

The latest crisis, now afflicting Lehman Brothers Holdings and AIG, is yet another in a series of shocks to the financial system. Unlike last week’s mortgage bailout of Fannie Mae and Freddie Mac, however, the government has refused to bail-out Lehman, and instead continues to offer special emergency funding facilities to all troubled banks since last year. Heading into Monday’s trading Lehman’s stock has crashed 95% from its high.

As for Lehman Brothers’ employees, heavily invested in company stock, the firm’s collapse means more people have seen most of their savings wiped-out this morning. That’s what happened to Bear Stearns Cos. in March.

At this point I think it’s fair to assume that unless the government, possibly in conjunction with stronger financial institutions and private equity funds, fails to organize a RTC-type of vehicle, then additional failures are likely. The public’s confidence has already been damaged this year with 11 bank failures to-date and wealthier investors pulling money out bank savings accounts.

Europe, by the way, which is about 6-12 months behind the U.S. credit cycle, will eventually have to create its own version of an RTC bail-out fund. This is probably most likely in the United Kingdom, Spain and Ireland – the weakest financial markets in the European Union. Each country is struggling under the weight of increasing real estate losses and write-downs. In the second quarter, most EU nations saw a contraction in economic output.