That is the million dollar question folks.

Many ideas and solutions have been presented on this subject, but one of the ideas that came to my mind recently was this:

Why doesn't the government create some sort of central agency to insure these banks from any future financial losses that they might suffer due to loans and securities going bad? Just like you and I get insured by the FDIC up to $250K, if we lose our money in a bank, similarly the banks should also get insured up to a certain amount (say $100 million for example) to cover their losses. Let me explain....

This system would be quite similar to AIG's credit default swaps in their Financial Products division, EXCEPT in this case it would be much more reliable and effective as it would be the federal government backing these loans ajd securities, and not just some private company who's at risk of going bankrupt themselves should a financial disaster of this magnitude strike.

So how would this central insurance agency be funded you ask? Good question...

Well, initially to get the agency off the ground a cash base would need to be established from the US taxpayer money. In my opinion, taxpayer money would be better spent and allocated in this way, instead of using it to bailout various individual banks, with no guarantee that they will resume lending again. However, the taxpayer will only be responsible for the initial cost of starting this insurance agency. After that, the funds for the agency would come from the Corporate Tax levied on the banks at the rate of 35%. A certain percentage of this corporate tax money could be set aside to deposit funds into this agency. Overtime, this would turn into a large pool of money that will go a long way in covering the losses of banks should a financial crisis like that happen again. However, at the same time, the federal govt. should not cover all the losses of the banks, as it is partly the banks' mistake also in this situation for taking on too much risk on their part. Therefore, they should only be insured up to a certain amount (say $100 million for example) and the rest of the loss should be "written-off".

What are the benefits to such a plan?

There are many benefits to this plan that I see. For one thing, banks would feel more comfortable lending money again. Additionally, the banks would have their financial losses greatly minimized by having a significant amount covered by the federal government. This would improve their financial position and allow them to start lending again sooner and perhaps even continue lending, thereby preventing a credit crunch like we face today.  This would mean the impact on the overall economy would be much less severe, as consumers and businesses would still be able to obtain loans and consumer spending would not fall sharply as it has now. Therefore, in such a plan both Wall Street and Main Street benefit.

What are the challenges?

The biggest challenge involved in this plan will be in ensuring that the federal government can cover enough of the bank's financial loss, so that it is in a position to lend again. One way to overcome this challenge is by monitoring how much risk banks are taking and adjusting the funds being allocated in the central insurance agency accordingly. Another way is by regulating and controlling how much risk banks can take, thereby ensuring that the central agency can adequately cover the banks if they suffer large financial losses. In reality, a mix of these two approaches will probably need to be taken.

Overall, I feel that the benefits of such a plan would far exceed any potential risks and downside that it may have.

Thanks for taking the time to read this and I would love to hear what your thoughts are on this plan.