Willem Buiter has an exceptionally fine blog post , which fisnished as follows:
"The balance sheets of the British banks are too large and the quality of the assets they hold too uncertain/dodgy, for the British government to be able to continue its current policy of extending its guarantees to ever-growing shares of the banks’ liabilities and assets, without this impairing the solvency of the sovereign. Britain risks becoming a victim of the new inconsistent quartet: (1) a small open economy with (2) a large internationally exposed banking sector, (3) a currency that is not a serious global reserve currency and (4) limited fiscal capacity. It risks a triple crisis and a threefold run: on its banks, on its currency and on its sovereign debt.
Limiting the exposure of the sovereign to what is fiscally sustainable may imply giving up on saving (all of) the banks. If my proposal for institutionally and legally separating existing stocks of assets and liabilities from new flows of credit and lending is acted upon, the flow of new lending and the supply of new credit need not require the survival of all (or indeed any) banks hitherto deemed systemically important.
I look forward to the time when I will be blogging on the best way of privatising the banks again, under new regulatory and governance regimes."
In essence, he argues that the government guarantee for the existing banks is, in effect, counter-productive.The guarantees should only be available for new lending, and the toxic assets should either be sold off for what they will fetch, with a government controlled "bad" bank amongst the bidders, or the banks completely nationalised and the toxic assets transferred for £1. After all, in this latter scenario, it makes no difference to the government's situation. At least at that point the true value of these assets would be established, the losses taken - and quite probably some of the purchasers will made undreamt of fortunes from the toxic and moribund assets.
But the system would be purged, and proper saving & investing, borrowing & lending could start again.
It certainly isn't as yet.