Debt forgiveness. Intriguing.
There is a better answer: Some form of debt forgiveness. If the face value of half of the debt was forgiven in exchange for some new government authority, the financial sector could be recapitalized at no cost to the taxpayers.
How could such a solution be achieved in a short period of time? I am not a lawyer, but it seems to me that Congress could approve a temporary amendment to the bankruptcy code for financial institutions. Indeed, there is a long tradition in U.S. history of rewriting bankruptcy codes during financial crises.
This time, an amendment would make available to companies a prepackaged bankruptcy in which debt forgiveness could be done overnight. To induce financial institutions to undergo this restructuring, the Fed could condition its provision of liquidity to the completion of the procedure. I doubt that any financial institution would choose to opt out.
If such a simple solution exists, why do we not hear about it? Easy: Wall Street would much prefer to be bailed out with taxpayers’ money than to be forced to pay for its own mistakes.