From the FT, a conclusion: states must nationalize their big banks now.
Banks borrow short and lend long. The short part is tough and so they don't hold to illiquid assets that are long or even mid-term. There is simply no credit markets right now.
The Level 3 assets (L3) are supposed to be long term assets that one invests in and can sit on to ride out volatility and reap the rewards of economic value creation. The debt that enables these investments is a good thing.
Without debt and L3 holding there can be, very simply, no growth in a economy. Capital preservation by liquidity hording is not a long term strategy, not even mid-term. It is a short term feral preservation mechanism. But from a galactic perspective, you are just holding on to bits in a computer, thinking they are worth something beyond the disk electrons that represent them.
When all else fails, the governments are L3 holders of last resort. They should be paid handsomely for that service (see TARP ongoing discussions for an example).
Let's nationalize the banking system and go home, yeah?