Credit crunch and response eerily a replay of Japan's depression

I previously argued in this post that unless the West learned from Japan's depression and worked fast to slow or halt the housing drop, we were in for it. Instead the model they are following is very similar to Japan's and though it won't lead to a 10+yr depression, will surely lead to a more prolonged and deeper recession. Yani the choice is between fast costly and tough cure OR slow and even more costly cure.

Lets re-visit Japan and the pre-credit crunch era...

In Japan, banks via Zaibatsu cross-shareholding system would lend to their associated companies which they also crossheld shares in, coroprate profits would go up, coroprate share prices would appreciate. This would in turn mean that the banks capital went up, they were able to lend more and especially to the real estate market. In the UK/US banks lend to their depositors/shareholders who invest in mortgages. The banks then set up special purpose vehicles aka off balance sheet vehicles which take on these loans bundle them up, put a gilt and package the whole as a AAA rated product. Banks then lend some more to others who buy properties from the banks original mortgagees who now swelling in cash buy more properties. Properties appreciate in value. Borrowers take this as home equity loans. And on the virtuous circle goes on and on.

Then the record stops playing...

Governments are then give the chance to act to stop the multiplier adverse effects. They have to take charge and instead of acting fast, stumble through huge but ineffective bailouts that don't touch the heart of the problem. Falling house prices, associated financial instruments and myriuad support insurance policies and wider deleveraging of the economy. In my humble opinion there are several stark choices:

1. Continue with incremental but costly bail outs as the housing market goes down. It will prolong the recession by another 12 months into 2011.
2. Tell banks to come clean on the how deep their problems are. Its easy to actually find this out via scenario and stress tools already being used. Set aside the funds to buy out the bad loans in exchange for management changes; changes in bonus structures and products/business lines. Those that refuse to take the funds must justify how they'll get the funds or govts take stakes in them. We start seeing the floor.
3. Nationalise all the weak ones, hiving off their good portions. More here...
4.