Financial markets are frozen throughout the world, and former FDIC Chair William Isaac puts the blame squarely on the Securities and Exchange Commission and fair-value accounting—especially the accounting method's requirement that banks "mark to market" their assets.
"The SEC has destroyed $500 billion of bank capital by its senseless marking to market of these assets for which there is no marking to market, and that has destroyed $5 trillion of bank lending," he said.
"That’s a major issue in the credit crunch we’re in right now. The banks just don’t have the capital to start lending right now, because of these horrendous markdowns that the SEC’s approach required."
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According to Isaac, the current crisis of confidence in world financial markets warrants that the FDIC declare a "systemic risk." (See the accompanying video for more.)
"Once they declare that there’s a systemic risk, the FDIC at that point can say that we’re going to protect all general creditors when a bank fails. If they do that, then I think the banks will start lending to each other again," he said.
"It’s just a lack of confidence, because we don’t know which banks are going to go next. And banks we never thought would go, have gone, and we don’t know how the government’s going to handle them," he said. For more stories from CNBC, go to cnbc.com.