As the liquidity crisis continues, the problem is clear—it's the solution that remains opaque.

The problem with the U.S. banking system is simple: It's largely insolvent. Banks have far too little capital to supply the credit needed to finance recovery let alone growth.

The insolvency problem is centered around so-called "toxic" or troubled assets that banks hold in great amount and which are today worth far less than cost—generally securitized residential home loans.

But the problem of insolvency is centered around toxic assets only in the sense that the problem of a burning house is "centered" around the place the fire started.

As Congressman Henry Steagall said the last time we faced a severe depression, once a fire is raging, the most important issue is how to put it out—not to locate the point of origin.

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