All the money is all the money. The money in the US is nothing more than the base of collectable assets in the banking system. It isn't the money printed by the Fed or any of that stuff we seem to be told, but this base of collectable assets. The limitation is the amount of money in the accounts cannot be more than the collectable assets on the balance sheet and visa versa, though the imbalance can exist for awhile in the direction that the collectable assets can exceed the money supply, but that the difference is what is perceived as bank capital. Thus bank capital is the collectable assets of the bank or banking system minus the deposit liabilities. If the banks collectable assets are less than the deposit liabilities, the capital has to lie in the deposits and not in the capital accounts of the banks.
The current attempts we are experiencing are to deny this fact and through time and slight of hand, convert the deposit liabilities into bank assets. Thus, we are having government issue plenty of debt which can only be paid by bank deposits, which when bought by banks through government slight of hand serve over a period of time to make the depositors liable to the banks. The purpose of the Fed isn't to give you and I money, but to redeem or liquidy bank assets so the banks can pay each other and for the minimal purposes of you and I having $100 bills we can draw from the banking system as liquidated settlement of our accounts in whole or in part. Even this is limited, as the government always wants to know where you got more than a few thousand dollars.
Everyone is going to have to take a haircut. The question is how large. It appears to me the bankers are getting an opportunity to lessen their haircut while transferring the haircut to their depositors. See, so much of the money in accounts at this time is defacto bank capital, as the truth of the matter is money in accounts does not belong to the insolvents that owe the banking system and thus the debts cannot be paid. The amount of non-self liquidating debt has reached the point beyond critical and the capacity to create new debt at a pace that would result in distribution of money wide enough to current bankrupts to float the system forward. Thus bank capital is in essense wiped out and banks are like Zombies in the "Night of the Walking Dead".
Where does money come from to recapitalize insolvent banks? It can only come from the deposits in the banks. It could come from the government, but if the government securities were matched with money in accounts, it would do nothing to increase bank net worth on a current basis. If it didn't come with deposit liabilities, it would merely widen the gulf between what is owed and what can be paid.
The TARP plan was at least a reasonable idea as to how to solve this problem. Short of closing the banks and making all the deposits good, this was really about all the government could do. How it was administered was a problem, in that Paulson forced all the big banks to take the money to hide which ones were really in trouble. Only a headless idiot couldn't figure out that BAC and Citi were in deep shit by mid 2007 if they only read the quarterly reports, so why the deception? Were they all broke and Paulson wanted to hide that? TARP didn't work because the banks wanted to get back to gambling and Tim "I have never been a regulator as head of the NY Fed" Geithner gave them back their I have money to spin the wheel card through allowing accounting fraud. Now banks are playing poker in an effort to strip as much of the deposit liabilities from their balance sheets as possible.
See, there are only 2 monies involved, bank capital and deposit liabilities and the 2 together cannot exceed the sum of bank assets. If the bank liabilities exceed the real value of bank assets, the bankers have no money and are in essense gambling with the money of their depositors, who are the real owners of all the assets of the bank, including the property that cannot be redeemed through payment. This is important because is really goes to who controls the country and to some extent commerce around the world. Is it going to be us prudent idiots who still have money left or the idiots that gambled and lost in an attempt to earn huge bonus checks and drive up stock prices?
My guess is that if they would close the banks that need to be closed, which is probably most of them, give the depositors a 50% haircut and a prorata ownership in the bank and all the assets, this would be a start to a solution. Most of the depositors wouldn't like it and I believe those that owed the bank money could be given a wash between their deposits and loans to start, but the current game is the bankers are looting the depositors and the game is getting worse, not better. Remember the guys that ran this system into the ground are still running it.
That would be the first step. The outside the banking game is going to take a haircut as well. The biggest danger is that the resulting drop in bank deposits would be a blow to the system, but then again, the banking system would have the room to take a haircut and those that needed money could sell their stock to those that don't. The people with no money and no credit are no longer part of the demand equation anyhow, other than their current earning capacity. Prices would surely drop, but as debt was liquidated, the price declines would eventually not affect debt.
The solutions I have presented are off the cuff. Remember that all the money is all the money and those that have the money are the only ones that can pay. Thus if the government incurs debts (giving government debt to bankers is unconscionable in that it is conversion of their depositors money to their money), those debts can only be paid at anything other than deceit by the money in the system. The question here is who owns the banks and I contend that in more cases than are being admitted, it is the depositors capital that is at risk. Remember what I just wrote that all the money is all the money and the depositors will be liable for the costs of their bailouts.