What's wrong with this and how does it differ from the Administration's plan

Nowadays a lot of banks have the bulk of their assets funded by things that are not deposits. Indeed at many banks deposits constitute less than half the balance sheet.

The old FDIC guarantee can’t stop runs because the run that happens is wholesale – it happens outside FDIC guarantee limit. If you want to stop bank runs the way that the original FDIC stopped bank runs you need to bite the “Swedish Bullet” – that is you need to effectively guarantee everything.

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However just as the creation of the FDIC did not require you to be “prepared to put all troubled banks in receivership” a Swedish guarantee also does not require you to put all troubled banks into receivership.

What the FDIC guarantee required – and what a Swedish Guarantee will require – is you be prepared to (a) regulate banks heavily on an ongoing basis, (b) test the capital of banks, (c) force them to be adequately capitalised (rasing money if they can), and (d) nationalise the banks that cannot raise adequate capital.

When the good times return you probably need walk away from this general guarantee. In other words you have to regulate banks in such a way that they can’t become large enough to destroy the whole economy - so that you reduce the systemic risk at the cost of stifling "financial innovation". That means that the recidivist Citigroup – a bank that seems to blow up every cycle – will never be allowed to become as big and nasty again. It would be a terrible policy outcome if we did not learn from this crisis and did not regulate in such a way that it was less likely to happen again. Willem Buiter's call for "over regulation of banks" looks right to me.

Krugman’s illogic however does not help the debate. There is a need to guarantee all banking assets – and it should be done provided it is affordable. There is no consequent need to nationalise the whole system – though there will be a need to have a process which will result in nationalisation of some institutions – what I call “nationalisation after due process”.