Six months after the failed Bush administration effort to “rescue” the US financial system, and after two months of failed efforts by his own new administration, at an expense to the American public of several trillion dollars and counting, the Obama administration is announcing plans to blow another $1 trillion in a massive taxpayer giveaway to investors who will be subsidized in an effort to get them to buy the so-called toxic assets on the books of the nation’s biggest banks.

The problem with this plan is that its goal–getting these zombie banks to start lending again–is not going to work.

It doesn’t matter how good the balance sheets of the banks are. Good companies, and even individuals and families with good credit, are simply not borrowing. As I wrote last month in an article titled “Follow the Money” in the magazine Treasury and Risk (http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the [1] -Money.aspx), the problem isn’t that banks are too weak to lend (though the zombie banks certainly are), it’s that the strong banks don’t want to throw money at bad borrowers.

It is the nature of economic downturns like this current one that companies and ordinary families don’t borrow, but rather cut back on their spending and try to reduce their debt, the better to ride out the hard times. It is only the companies that are in trouble, like General Motors, Ford and Chrysler, that are looking for loans, and no bank is going to want to lend to them regardless of how much money the government pumps into it. (And if the public decides that it is in the national interest to prop up such companies, it is much more effective to have the government loan them the money directly, rather than try to get banks to lend it to them at much higher interest.)

What this means is that all the Obama administration, the US Treasury and the Federal Reserve are doing by buying the toxic assets off the books of banks like Citigroup, Bank America or Wells Fargo is giving a taxpayer handout to those banks’ investors and bondholders–the very people who enabled those companies to invest in the corrupt credit default swaps and other shady derivatives in the first place.

What should happen? Citibank, Bank of America, Goldman Sachs, and the other financial institutions that made bad bets on these structured financial instruments, should be allowed to fail, taking with them the investors who played this dirty game, and the managers who decided to gamble instead of run conservative banking operations.

The government would protect the assets of depositors in those failed banks, which would be sold to healthier, better run banks, making those banks much stronger and better capitalized in the process–and thus ready to start lending as needed. This is standard operating procedure for the Federal Deposit Insurance Corp.

Note that this process would mean no crisis in the economy, since the ability to access credit would not be crimped in the least by the failure of some of the country’s larger banks. It would, in fact, probably be enhanced.

The toxic assets would be eliminated through the bankruptcies, and the government–and taxpayers–would be $1 trillion less in the red.

Why isn’t the Obama administration doing this? Because Obama has put his trust in the advice of men–Treasury Secretary Tim Geithner, Chief Economic Advisor Larry Summers, and, informally, former Clinton Treasurer Robert Rubin, all linked to the investment bank Goldman Sachs, which was also the corporate home of Bush Treasury Secretary Henry Paulson. The same Goldman Sachs which was given $10 billion in Troubled Assets Relief Program funds directly, and which then snagged another $13 billion in TARP funds in secret, which was laundered through the now-government-owned insurance company AIG.

Columnist and Nobel economist Paul Krugman writes in today’s New York Times that the latest White House bank rescue plan will fail. He goes on to say, “This is more than disappointing. In fact, it fills me with a sense of despair. … It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.”

It should be clear at this point that the Goldman cabal burrowed deep inside the Washington apparatus is working not to rescue the US economy, but rather to ensure the survival and enrichment of the big banking establishment, and of course Goldman Sachs.

What we are witnessing in the policies of the Obama administration is not the creative experimentation of a modern-day Franklin Roosevelt, but rather the greatest heist in the history of mankind, as trillions of dollars in public funds are shifted from taxpayers’ pockets into the hands of the very banks and bankers and bank investors who brought us this financial debacle.

Instead of decrying the bonus payments to AIG executives, the American public should be demanding the indictment of Paulson, Summers, Geithner and Co. for IGL: Incomprehensibly Grand Larceny.

Instead of trying to rescue the nation’s giant banks, we should be demanding that they be shattered into little harmless pieces.

Come to think of it, maybe it’s time for a run on the banks–not because your money is not safe at Chase or Citibank or B of A, but because these institutions need to be killed off for the good of the nation.

If you have an account at any national bank, go there tomorrow and take it out. Transfer it to a local bank in your community. You’ll get better service, your money will still be just as safe, and you won’t be propping up institutions that have been stealing the country blind.