Well, begin somewhere... I'm not saying all would be fine and dandy by letting big banks fail, but it would be better than what we're seeing now.

What we're seeing is more obfuscation and uncertainty, with banks which haven't revealed what the next ticking bomb is... When Sweden and Japan had banking crises, the problems only got solved after banks were forced to reveal whether they were solvent or not, by disclosing their credit assets.

Well, considering that most of the banks are now under control of the Government - or, the Government holds a large part of them, I'm pretty sure the Gov't would already know about most/any big busters from now on, and can offer protection for them.

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You have to consider the fact that some banks are too big to fail, just look at HSBC - it's the largest bank in the world (up until the recession it was the largest company in the world), it played an integral part in the sub-prime mortgage market, and yet it came out of it pretty much unscathed. From Wikipedia:

Although it was at the centre of the subprime storm, the wider group has weathered the economic crisis better than other global banks. According to Bloomberg, "HSBC is one of world’s strongest banks by some measures."[30] When HM Treasury required all UK banks to increase their capital in October 2007, the group transferred £750 million to London within hours, and announced that it had just lent £4 billion to other UK banks.[31] In March 2009, it announced that it had made US$9.3bn of profit in 2008 and announced a £12.5bn (US$17.7bn; HK$138bn) rights issue to enable it to buy other banks that were struggling to survive.[32] However, uncertainty over the rights' issue's implications for institutional investors caused volatility in the Hong Kong stock market: on 9 March 2009 HSBC's share price fell 24.14%, with 12 million shares sold in the last few seconds of trading.[33]

It's not about what banks deserve. The main issue is to force banks to reveal their bad assets before government throws good money after bad. That's what Sweden and Japan did to solve their banking crises and it worked. Everything else failed, it just delays the problems at great cost to taxpayers.

You're just parroting the position of the politicians and central bankers who want us to believe big banks can't fail. I still haven't seen any reason why bailing banks out without auditing them is the correct solution. So please share those reasons if you know them.

I guess I wasn't clear. I was speaking about the economic damage here in Canada, which yes, was a secondary effect of the housing bubble. There's no disagreement here.

How much bad debt have UK banks written off in their fiscal reports? That should be the first thing to look at, if we want to assess whether everything has been disclosed.

It can't though.  If something were to happen to the banks to cause them to fall where the uk would need to start paying everything themselves.. it'd quickly approach an icelandic meltdown.

@kowenicki / SamuelIRSmith: Just one more thing...

If you believe US/UK's assertion that banks too big to fail have to be rescued, what's the point of saying that those bailed out banks have been properly audited before billions of dollars were thrown at them?

You can either believe that they wouldn't let big banks fail, or you can believe that an audit would determine whether a bank would get rescued or not. You can't have both.

Considering how some of the latest bond sale has gone for Britain and that it was put on negative credit watch by Standard & Poor's for downward re-rating from its current AAA back in may, one can ask himself how much safer should one feel.

Edit, wrong post.

For it to go out of it the quickest due to it financial sector, you need investor to bring back money into the system. Strangely, looking at the world best perfoming index, it seem that investor are deciding to invest in country who still have some potential for growth in the near to mid future. Funny how that work.