Ever since the $25 billion settlement over foreclosure abuses between five of the nation’s biggest banks and the state attorneys-general was announced, there’s been a steady drumbeat of naysayers who’ve asserted the deal does more for the banks than it does for homeowners. And barring some happy accident in which the settlement somehow inspires banks to behave, they’re probably right: In comparison with the estimated $700 billion difference between what people owe on their mortgages and what those homes are actually worth, $25 billion is peanuts.

But the problem isn’t that the settlement is part of some grand plan by the government to help out the banks. Rather, the problem is that the government doesn’t seem to have a grand plan for the banks.

For all the current and well-deserved bank bashing, few question that a well-functioning economy is predicated on a well-functioning banking system. And few question that confidence is a critical ingredient. So then the issue becomes: What kind of banking system do you want to have, and how do you inspire confidence in it?

At two major junctures, our government (Congress went along with the Bernanke-Paulson-Geithner triumvirate) made the call that it wanted the banking system we had, not a radically reshaped one. First, the government bailed the big banks out in the fall of 2008. Perhaps more critically, the Obama administration made the call not to break them up or nationalize them in early 2009. In a sense, this new settlement is a continuation of that call. As Yves Smith at Naked Capitalism has pointed out, it’s a bailout for the banks: It will reduce the amount that people owe on their mortgages, thereby helping them afford their home equity lines of credit, roughly $400 billion of which are parked on the balance sheets of the big banks. And Scott Simon, the head of the mortgage business at bond giant Pimco, has argued that investors, not banks, will bear the brunt of the cost of any mortgage modifications.

But most important, the settlement lets the banks off the hook for repeatedly breaking the law in the foreclosure process. One analyst who has studied this tells me that their legal transgressions alone could have been used to rip apart the banking system, had the government desired to do so. Even if it’s true that the banks merely violated technical aspects of the law, and didn’t kick anyone out of a house who deserved to stay, that still flies in the face of everything we’re supposed to believe about the importance of the rule of law. Next time you get a ticket for running a red light, try arguing that you shouldn’t have to pay because you didn’t hit anyone.