I learned in my medical anthropology class, there are two broad types of illnesses in medicine, acute and chronic. Acute illnesses are typified by rapid onset and short course. Chronic illnesses are longer lasting more prolonged and assumed to be multi-symptomal and or multi-causal. Chronic illness could be a state of multiple regression in subsystems. Both terminate in recovery limited capacity or termination. Lehman is a case in point of an acute case leading to termination.
Here is a snapshot of various big money banks CDS (credit default swap) spreads, presented as risk condition proxies.
The analysis shows the acute crisis of Lehman brothers considered a liquidity crisis in sept 2008 and the current more persistent chronic crisis reflecting fundamental solvency issues.
It appears that the acute attack was mitigated with liquidity, but the chronic condition persists. Sadly I see know way out of the chronic process other than inflation or termination of the current banking infrastructure and nationalization is only an ownership change not a radical restructuring. Neither "solution" is near term (3-7 years) appealing, but please look at the alternative of 28 years of stale growth in Japan as measured by equity returns.
My choice between the Scylla and Charibdis of inflation vs banking Ctrl+Alt+Del is actually Ctrl+Alt+Del for the banking sector.
We are currently distorting the banking market by crowding out the institutions (if there) are any that were prudent. Keeping the current structures and systems in place isn't so great. Lets have the prairie fire and restart fresh and fast.
The chart indicates a sharp return to the levels of the acute phase of the problem seen earlier. The actions taken today will determine the next 15-20 years economically.
I offer the chronic vs. acute discussion, because we are trapped by language in sharing our understanding of things. The language of economic phenomonon is limited and the 7th inning stretch and uncharted waters metaphors popular last summer do little to help the discovery process or debate. Medicine has a robust lexicon to decribe complex sytemic issues. Lets hope economics can advance to more nuanced concepts.