Planet Money has a great segment called Get Tougher, Please. Give it a listen. Economist Adam Posen of the Peterson Institute argues the financial reforms are way too wimpy – we need to get tough on the banks.
Allowing banks to keep toxic debts on the books for years will create zombies (and stagflation) for a very long time – until the assets magically become worth something (in which case the banks will sell them) or they finally go bankrupt. Adam also argues that the banks tend to make things a lot worse when they are on the brink of solvency – more risks and ultimately less stability for our economy.
So we need to get tough. Tough means you send in government officials, go through the books and get the banks to declare their real worth on all these toxic assets. This will mean a fair number of bankrupt banks, but we have experience and institutions that can properly deal with that.
The downside for this nationalization type of action is the short term hit our financial markets will take. But once everyone knows who is solvent, and who is not, the foundation for future growth will be solid. But is there enough political will to battle through short term disruption for long term growth and prosperity?