Harvard Professor Greg Mankiw pithily explains my solution to the broken banking industry.

If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.

Bankruptcy could become, in effect, a massive bank recapitalization. Essentially, the equity holders are told, "Go away, you have been zeroed out." The debt holders are told, "Congratulations, you are the new equity holders." Suddenly, these financial organizations have a lot more equity capital and not a shred of debt! And all done without a penny of taxpayer money!

There's no reason for banks to go out of business, but their shareholders need to be wiped out. (Including me, I guess.) Bankruptcy is the normal way this sort of thing happens, but if we need to use different magic words then let's get on with it. Instead of spending trillions of dollars over the past several months trying to bail the banks out, we could have been done with bankruptcy reorganization by now!

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