Why would we have anarchy if some big banks failed? Lehman Brothers went into bankruptcy and we're still here. 

It's becoming more and more clear that the "too big to fail" idea is just a way to steal money from taxpayers to bad banks with no clear long term benefit. In the end the debt is just being shifted around instead of solved.

We clearly need a banking system... we don't need every existing bank though.

This is what I've tried to argue before. The people who take the risk with debt is those who are handing out the credit, not those taking it out - especially in the short run. If you decide you can't pay your debt, you don't go down the pan, the person who lended you the money does. The issue lies when you want to borrow more money, and you have a history of not paying it back, very few are going to be willing.

As for Iceland, they went down the shitter because lots of institutions (particularly UK ones), demanded their money back from the banks once people lost their faith in the financial sector. The banks didn't have to money to give back, so, as Kowenicki put it, the shit hit the fan.

The issue with the UK, though, is that the banks are so large and important that if they failed, they'd drag other banks down with them. There's a lot of inter-bank lending that goes on, and one of the problems was that banks weren't keen on doing this anymore (because they were worried about the other banks failing and thus not being able to pay the money back).

Letting a bank like Llloyds or Barclays fail could lead to the entire system failing.

Correct me if I'm wrong but I think all those things happened after it became clear the US had a housing bubble, which caused banks to become insolvent.

I realize that the banking system is a big mess... but just injecting money into every failing institution doesn't solve any problem. What would solve problems would be to force banks to reveal their toxic assets, and do whatever's needed to erase them. Yeah, lots of loan defaults would have a fast and bad impact on the economy, but at least the problem would be mostly gone immediately.

The problem now is that we simply don't know what atomic bombs are waiting to explode inside the banking system. Exactly the same situation as last year before the USA banking collapse.

Doesn't the UK have insurance for deposits? Unless you don't I don't see how savers would be enormously affected.

Businesses could get working capital from solvent banks or from the government directly, and the same for banks which were otherwise solvent. Give them temporary loans while the bankruptcy process is ongoing, and then give them whatever can be salvaged from the bankruptcy process.

Injecting money into the banking system is working, though. Banks are lending more, now. They're profitable, and some banks have started paying their bailouts back (read: Northern Rock).

dont post so quickly, i cant keep up, im trying to read what youre saying!

You could look at debt another way by looking at the external debt per capita:

The United Kingdom has over $175,000 in external debt per capita
The United States has over $42,500 in external debt per capita
Canada has (roughly) $35,000 in external debt per capita.

When you look at it ias a function of GDP:

The United Kingdom is at 375% external debt to GDP
The United States is at 95% external debt to GDP
Canada is at 60% external debt to GDP

Profitable banks which are lending out money... that looks exactly like what was happening before the collapse.

Sorry but that alone doesn't convince me. The banking system has a lot to do before they gain trust back (at least from me). I mean, those profits are often "paper profits" which don't translate to reality.