Willem Buiter in the Financial Times writes a long article (read the whole thing) on how treating the bankster's solvency crisis as a liquidity crisis isn't doing anything except pissing away more of the taxpayers's money (some of which the banksters then use to lobby our friends, the Democrats, to -- and I know this will surprise you -- piss away even more of our money). He concludes with the following policy prescription:

Pushing on a string is difficult. Pushing a zombie on a string is even harder. Pushing a zombie bank on a string is impossible. Unless the balance sheets of the banks are strengthened sufficiently, through massive further injections of capital, the removal of toxic assets and much lower leverage, unconventional monetary policy will not work. The banking system in the north-Atlantic region is not facing a liquidity shortage - it has got liquidity coming out of its ears. It is facing a capital shortage. Much of it still totters on the edge of insolvency. Recapitalising banks slowly through large spreads on low business volumes and through quasi-fiscal subsidies extended by the central banks in their financial support operations will take years - years of impaired intermediation and abysmally restricted external finance for households and non-financial corporations.

Recapitalising the banks and paying off private household debt through high unanticipated inflation would be possible, but undesirable. I propose a combination of mandatory recapitalisation of the banks and a debt Jubilee for the household sector to remove the two key obstacles to an economic revival. The mandatory recapitalisation would be first through new equity issuance in the market, then though mandatory debt-to-equity conversion and similar haircuts for unsecured bank creditors, and last through increased government equity stakes. All these capital injections should take the form of tangible common equity. Anything else would be cosmetic.

Subsequent regulation of the banking sector (broadly defined to include all highly-leveraged entities with serious maturity and/or liquidity mismatch on their balance sheets) will then be necessary to prevent a recurrence of the disaster we are now struggling through.

In preparation for the Jubilee, I am going long in ram’s horns. In good Torah/Biblical tradition, we should have one of these every 49 or 50 years. We skipped a few. Let’s have a big one now.

Why not? Of course, since the banksters are running the country through the Finance Wing of the FKPD, taking care of that aspect of the situation is the first priority.

Of course, some may prefer debt peonage as the way forward. There's that.

NOTE The ram's horns are a Biblical reference. Buiter link is via Edward Harrison at Yves place, which proves once again, as if this needed proving, that the econoblogs are far superior to the A list, in that they consistently come up with superior links and policy proposals. That's because writing about politics on the A list is to writing about political economy as writing about sports is to writing.

UPDATE I'm now listening to NPR on "American Resilience." They make me want to throw up.