So what you are saying is that "banking" is a "confidence" game not one of sound business practices and for joe lowly taxpayer to question the banking business model is to undermine that confidence game to the detriment of us all?

Banking is the art of financial intermediation- the provision of 'liquidity' or capital; the taking of deposits and making of loans. It is not possible to make a loan without creating risk (of various types). And as the now exposed fallacy of the derivative markets demonstrate, it is not possible to hedge that risk out of the system- hedging is a zero sum game, and the system retains it all.

It is because risk is endemic and omnipresent that banking is inherently fragile as subject to rumor. The proverbial self-fulfilling prophecy whereby people come to believe for whatever reason that a bank is fundamentally unsound, and that believe commences a bank run that topples the institution (and wipes out some depositors/creditors) whether or not it was the case that the bank had problems. The bank could be 'perfectly healthy', (or at least as perfectly healthy as it is ever possible to be given that asset values are dependent upon stable economic relationships and accurate, unbiased assessment in a world where neither exists), and still succumb to the bank run. So the answer to your question is that there has never been, nor will there ever be a circumstance where banks can exist without 'confidence' in their solvency and competence.

We did not create this problem by the way, but we did create awesomely flawed theories that system excesses could be floated away on a tide of government sanctioned liquidity, what shooter is advocating on this thread. Let's just say that it was very convenient for a lot of people to buy this story, and some didn't but still played along.

That was our sin, and it was a doozy. The application of these theories whose flaws were apparent contemporaneously, caused the economy to forgo the natural retrenchment that must happen from time to time, especially where there are substantial exogenous shocks such as has been the case in our economy by the rise of the Asian economies. When that retrenchment is delayed, even for a short time, the maladjustments compound exponentially- people are trained and gain experience in jobs and industries that are not viable, homes, roads, power plants, bridges, etc. are built of the wrong type in the wrong location, spending habits are formed, etc. etc. etc. In the 25 years we've been doing this stuff, the economy has become less and less sustainable, until as recently as 2006, the US was consuming fully 80% of the world's excess savings. Something had to give.

And how. Now people want to look for villains, and that's understandable. However, beyond a few elite in the Fed, (if you read Greenspan's early stuff, it's clear he was consciously obfuscative), there really was no cognizance of what was going on, and what was destined to happen, even if that thought process was greased by its convenience. The AEI Wall Street Journal types that vigorously cheerlead this whole thing with pompoms in hand, (and who, like Kudlow, still lack the decency to stop opining about all things financial), actually believed their own crap- got high on their own supply. The Kudlow and Company types who railed against the Grantham and Roubini types, the 'permabears', were certainly talking their book, but there's no way they knew the extent to which the system they praised was rotten to its core. And, frankly, the American people kept consistently voting for people who told them how great their economy was, and how great they were, and how rich they were, etc. etc. etc. We wanted to believe it, they wanted to believe it, and more to the point, they didn't want to tell us otherwise, but all of that doesn't make it so. And here we are.

Someone asked me if I could explain the impetus for, history of, and proper role the Federal Reserve without using jargon in 50 words or less. The answer is no. What I can say is that the federal reserve banking system was intended as a bulwark against the types of banking crises that riddled the 19th and early 20th century landscape. It was intended to allow sound banks that were enduring bank runs to keep operating, thereby buttressing confidence in the system as a whole and staunching crises. In addition and as part of that role, the Fed was put in charge of regulating the banking system with respect to key variables like reserves that control the money supply. Let's just say it has strayed far from its original mission. I don't think policy makers and businessmen envisaged control of the business cycle, which was arguably our original sin. Their focus was on creating a sound banking system, with full awareness that a bank's fate is always tied to that of the broader banking community.

And now I really have to get some work done.