Professor Edward Kane:

We have to begin somewhere. At some point a government has to clean up the mess. I try to distinguish three elements: the crisis, the restructuring and the aftermath. The trouble with blanket guarantees is that they give away a lot of resources at the start and very much constrain what can be done in the later restructuring phase and in the aftermath. I believe that it makes sense to call for a banking holiday of a short period to sort out which are the really insolvent banks. The idea is to take them over temporarily, stop their loss-making and sell them back to the private sector as they are restructured.

The trouble with these various mercy and helpfulness norms is that we let institutions get so far under water that by the time we step in to restructure them or give blanket guarantees, the size of the problem is daunting. It is necessary that we find ways of uncovering these problems earlier. Again, by re-orienting what auditors would have to do and how taxpayers would be treated, we will lessen the chance that many institutions will get into this problem.