Uh, not every bank is insolvent and not every bank will be insolvent, regardless of how bad this gets.
Still, your end result is entirely possible because the key point is that most of the "big banks" - BAC, C, WFC, JPM, etc. are all completely underwater
Here's the key point: Trying to prop these banks up with government lending or buyout of their assets or nationalizing them without cramdown of their bad assets (one in the same solution actually) with not only crash our markets but will also endanger the stability of the US government and its funding mechanisms as a whole.
There are no solutions I can think of where the market doesn't crash again at some point in the near future, but we must make sure to choose a solution that does not screw up the stability of the US government or its ability to maintain funding.
I can't repeat this enough. And Obama needs to stop dicking around on this matter.
There is no way to absolutely ensure that the US government 'maintains' its ability to get funding. Check that, there is a way... start acting like an empire: invade other countries and seize their property, then use that property as collateral for debt. But besides that, there is no guarantee that anyone will continue to lend to the US government.
Even if the government were to, tomorrow, stop issuing new debt and try to balance the budget, or use a portion of its revenues to pay off the principal on existing debt, its ability to borrow could still come under attack later if debt-deflation continues for a long enough period of time to the point where its revenue base shrinks, and then some other country (Spain, Ireland, the U.K.) defaults.
There are risks on all sides right now. There are risks to not spending enough just as there are to spending too much. I have not yet seen a convincing case that
X dramatic event will definitively occur.
