Could this solve the credit / banking crisis?

I was reading up at another forum and this was posted:

"1.Federal government takes over small banks with small toxic balance sheets. These banks would be located in all 50 states.2.Restructure these small banks3.Infuse large amounts of capital.4. Private investment firms would then take over these banks and return of federal government investment would be paid back.5.Government would not run these banks but "Private Investment firms"6.Let the big banks fail and the strong will survive to compete against the smaller restructured banks.7. Credit would start flowing.
The US government should not help pay the principal of defaulting mortgage. The free market should determine the prices for the real estate market not government. The US government should not nationalize banks but take equity in stocks. I believe the US government can help small banks to clear small toxic assets. It will cost the US taxpayers 20 trillion dollars to rescue the big banks. It will cost the US 2 trillion dollars to rescue small banks and infuse credit into the economy. The US financial system will start from square 1.I am disappointed by Obama and Congress.?What the US government should do1. FDIC will take over small insolvent banks with small toxic balance sheets. Clear the loss assets.2. The government will infuse capital into small banks.3. The Federal government will own common shares of these small banks.4.The US government will infuse large amounts of capital to unfrezze the credit market into these small banks.5.Private investors such as Warren Buffet will run these banks.6.Once these small banks become profitable the investment capital will be paid in full plus interest."

This isn't a banking or a financial crisis. Like all past crises, this one began when there were serious problems with the real economy first. As in all past recessions, real gross investment began to fall, signaling a change from capital accumulation to capital consumption:
http://research.stlouisfed.org/fred2...ax_630_378.png

In other words, businesses were no longer repairing existing capital and buying new capital to expand production, they were not buying any additional capital and letting their existing capital deteriorate.

Because of the capital consumption, business that produced capital, such as construction businesses, had lower profits and thus had to lay off workers:
http://research.stlouisfed.org/fred2...ax_630_378.png

Less workers and lower wages meant less people able to pay off their mortgages, which led to the financial crisis.

The key question here is: why did our economy switch from capital accumulation to capital consumption? The answer is that our economic growth and capital accumulation was phony, it was based only on credit expansion from the Fed and from private banks. All the new credit fueled the purchase of new capital and the repair of existing capital, which allowed our economy to grow.

However, when the newly created credit began to circulate throughout the economy, it redirected from capital-producing businesses like construction and durable goods manufacturing to consumer good-producing businesses like retail. Lower profitability for capital goods producing businesses meant that they could no longer hire as many workers, they had to lower real wages, and lay off some existing workers. This, in turn, meant that consumer good producing businesses had lower profit margins because less people were buying their goods.

Thus, lower real wages and sectoral imbalances in the economy caused the financial crisis.

The only cure to this is to let all of the phony wealth and credit-based businesses to go under. The only reason they existed was because they were able to get easy credit created by government institutions. If we follow the proper course and allow prices to fall, banks to fail, and businesses to go bankrupt, the economy will restructure itself relatively quickly.

As Schumpeter pointed out, we need the deflationary recession to wipe out old investments and allow real economic growth to occur again.

By bailing out banks, any banks, including small banks, you are simply redistributing wealth and socializing losses, not actually helping the economy.