Mad Rogue Tar Baby Alert

Like Br'er Rabbit in the second Uncle Remus story, the more we fight the economic Tar Baby with more of the same while expecting different results, the more trapped we shall become. Debt must be liquidated, and unfortunately, that means bank shareholders and bondholders are entitled to receive what anybody else should receive from investments that proved to be worthless: SQUAT.

One possible solution was suggested by a regular follower of this blog:

(T)he worst of the failing banks should be seized by the FDIC, have their shareholders and bond holders wiped out, and have new corporations set up with the assets of the banks but not the liabilities. These corporations/assets can then be taken over by the healthier banks, which will strengthen them and help them survive. In short, separate the sheep from the goats in a kind of triage process. This is sort of an American version of the Swedish solution (of 1992-TEB). A key part of the Swedish solution, by the way, was to force the banks to write off all of their bad assets, which made it clear which banks could survive and which ones couldn’t. The U.S. banking industry is (or at least until recently was) about twice the size of what it needs to be because of all of the false and nonproductive activities that had been taking place in the industry involving the financing of homes at inflated prices, the slicing and dicing of loans under conditions of pumped-up leverage, etc. If the Treasury department continues to try to prop them all up, the financial system will just continue in its current dysfunctional state. By the way, Roosevelt’s bank holiday in early 1933, from which many banks never reopened, actually roughly coincided with the time that the U.S. GDP stopped shrinking and started growing again. I think this is in part because the surviving banks were strengthened by the industry purge, realized they could trust each other and lend to each other, stopped hoarding money to such an extent, and helped get the money flowing again (increasing velocity of money, as the economists put it).
-Astatula Map

So we should bite the bullet, take the hit, achieve transparency and a clean slate so we can move on. To be sure, the result will be distasteful for many in the short-term (more deflation, more bankruptcies, and higher unemployment), but much healthier in the long run. Anything would be better than using a squirt gun to put out a house fire, which is basically what our dilly-dallying hath wrought thus far. WWRPD?