In your comment on Americans shorting Reits you talked about letting the banks fail over the debt crisis. Certainly, letting corporations and individuals fail due to their debt would be a cleansing process in that the weak would be cleared out and hopefully only those associated with the problem would be affected.

In the case of letting banks fail, I wonder whether governments don't let it happen (at least with the big ones) because of the way it would affect millions of depositors who have nothing to do with the problem. In Canada for example, if RBC, TD and BNS were allowed to fail, the CDIC would be unable to reimburse the depositors (ordinary Canadian citizens) and a high percentage of Canadians would suddenly be impoverished. With much of the nation unable to make ends meet the economy would tank which would in turn cause other businesses to fail which in the end would likely result in a long time of poverty for the country.

The strategy of governments, the US anyway, up till now has been to let small banks fail and prop up the big ones determined to be too big to fail. They do this by many means including taking on sovereign debt and printing money. These are lousy and shortsighted approaches to use as they too come with their own set of nasty results, similar in some ways to the aforementioned scenario I painted.

My question then is, which scenario is worse? Are governments saying that both are bad but we think that letting any bank that's in trouble fail is far worse? I ask this because although it's tempting to just say, "let the banks that created this mess fail" I suspect that the impact on almost everybody in a country would be far worse and longer lasting than we might imagine.