should we let bad banks fail?

Yesterday on ABC news, Rep. Shelby argued that the US should let the bad banks fail. (Shelby: 'Dead' Banks Should Close; Citigroup a 'Problem Child')

Arguments for:

• cheaper in the long run
• quicker recovery
• "The new banks will be more credible once they no longer have these liabilities on their back." create a market for the so-called 'toxic assets', and thus they can be realistically evaluated
• existing banks would be more competitive than they would be under a nationalization scheme, since existing banks will not have to compete with state-run entities
• confidence is already so low in the banking system, and stockholders have already been wiped out, that allowing the struggling banks to fail won't cause much more damage

Arguments against:

• widespread bank failures would wipe out shareholders and deposits in the short-term, thus reducing liquidity in the marketplace and further damaging the chances of economic recovery
• widespread bank failures would damage confidence across the board, like we saw after the failure of lehman brothers but on a larger scale.
• no solution should be one size fits all -- need to address each struggling bank with a unique solution. Maybe let some banks fail, but there may be others that really should be rescued.

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