Why not just play by the existing rules and rescue the economy, rather than the banks and their foolish shareholders and counterparties?
The choice for the Obama administration comes down to this: pay a subsidy to weak banks and reward failure and self-dealing or shut them down and start over again.
Because it doesn’t want to run the banks, and who can blame it, my bet is that the U.S. government will go the subsidy route, but it would be wrong.
A better idea is nationalization of the banks that can’t function combined with fresh capital for lending, perhaps in new institutions or newly managed ones built from the wreckage of the failed.
As Nobel prize winning economist Joseph Stiglitz points out, the United States has an existing process to deal with failed banks.