There are banks that are solvent and there are banks that are not. They all know who is who. The ones that are solvent are the ones to “restart” the credit engine. More precisely, there is already a credit market working just fine between banks that are solvent and trust each other. The problem is with bringing the lousy bastards back into the system which are the bigger banks.
In the fullness of time, the solvent banks will help the market get back to normal a lot faster and with less pain than government intervention, and it is entirely possible government intervention could ruin the good the solvent banks are doing. All the more reason for Paulson to stay home and eat his Peking Duck.
I beg to differ that all the banks “know who is who”.
If everybody knew who was clearly solvent with low future writedowns, then banks would be fighting to lend to them and to get their business. And they would be lending to any and all good risks.
That the works are completely jammed up tells me that they do not “know who is who”. What makes you believe anybody reliably knows who is solvent. Today, we know that the Fed has put their money on keeping 9 big banks solvent, so there is high likelihood that those 9 banks are in decent shape.
Other that, who is solvent and who is insolvent?