Bailouts: catching a falling knife

"The problem is this: banks made bad decisions that impaired their capital base. In a fractional reserve banking system (which actually has some similarities to a Ponzi scheme), a poor capital base creates distrust and, eventually, panic and insolvency for banks. Therefore, when credit revulsion occurs, banks must rein in lending to increase capital for fear of insolvency. It is futile to prod the banks into lending more. Credit revulsion has set in and their legitimate fiduciary responsibility lies with increasing capital to remain trustworthy and solvent. To be clear: those calling for banks to lend more fail to understand that banks do not lend when their capital base is compromised."