Simple Solution to Banking Crisis

The ship may have already sailed, but the ongoing credit crisis could have been very easily solved. Overly complicated financial transactions got us into this mess, and a simple one might have gotten us out. This is so simple that there must be something wrong with it.

Instead of feeding $700 billion into the voracious black hole of wealth obliteration that is the post-postmodern investment banking system, we should have just let the free market do its thing, tempered by minimal government involvement of course.

It would have been better to simply let the insolvent banks fail. Small depositors (that's you and me) would have been made whole by the FDIC, and the big boys who created the mess would have lost everything. Fair enough, right? It would have been a lot of pain to bear for a tiny minority of extremely rich financiers, but for the rest of us, it would have worked out great.

After the system had been purged of the bad banks and their toxic assets, the FDIC payouts to small depositors would have flowed into healthier banks, shoring up their capital reserves and making more money available to lend.

It would have worked like this:

MegaBank, where I bank, goes under. I take the FDIC payment that guaranteed my MegaBank deposits, and put it into MyTown Savings Bank, whose balance sheet is holding its own. MyTown Savings would now be able to lend money to people who want to buy the houses that are for sale in our town.

The executives at MegaBank would not have gotten their bonuses and would be out of jobs, but they'd figure something out.

It is such a simple solution to the banking crisis! Even Republicans could agree with such a free market solution. Surely I've made a mistake in my logic somewhere... but I don't see it.