On Monday, the Guardian reproduced a Wikileaks cable dated March 17, 2008, stating:
SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY
SAYS BANK OF ENGLAND GOVERNOR
Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle.
Systemic Insolvency Is Now The Problem
King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged.
Top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out since 2008 that the Federal Reserve, U.S. government, and virtually all of the central banks and governments of the world are approaching the financial crisis completely wrong, as they are treating it as a liquidity crisis, when it is really a solvency crisis. See this, this and this.
The fact that the head of the one of the world's most powerful central banks told the Deputy Treasury Secretary and American Ambassador to England that the economic crisis was a solvency - not liquidity - crisis, shows that this was hardly a renegade visionary insight.
You restructure insolvent institutions. You don't prop them up with temporary liquidity.
As many top experts have said for years, we must let insolvent banks fail; if we don't, the insolvent banks will drag down the economies of their host countries and put them into sovereign debt crises.