I've been weighing up a very elegant treatment for the banking crisis that has been buzzing around the economics blogs - so elegant, in fact, that it took me several days to convince myself that it wasn't just a logical sleight of hand, the kind of subtle fallacy that mathematicians use to "demonstrate" that 1+1=1.
One way to understand the banking crisis is that the banks cannot raise new money and lend it to people who could use it. This is not because there is no money, or no deserving investment projects. It is because the banks, whose assets are worth less than they hoped, are now weighed down by their existing promises to repay depositors and other creditors. They cannot raise fresh money because nobody wants to lend money to a near-bankrupt bank.
So far, governments have been trying to raise or at least stabilise the value of bank assets, but an alternative is to reduce the burden of their liabilities.