At least, according to Dean Baker.  His argument seems to boil down to this:

Fixing the banks does something about the supply of loans. 

There are four big sectors.  Household spending, construction, big company investment, small company investment.  The first two can't recover because they needed a housing bubble, and there is now a glut of housing.  The big companies are in no difficulties and are investing just as much as they want.  The small ones may need finance, but are not big enough to make much difference.  Ergo, spending money rescuing banks is a criminaly unjust waste:

"The word from this distinguished group is that if we can get the banks lending again, then the economy will be on its way to recovery. Coincidentally, the central ingredient in their formula is throwing hundreds of billions, or even trillions, of taxpayer dollars at the banks. In other words, they want to impose huge taxes on ordinary workers to give more money to the people who were most directly responsible for the propelling the bubble."

This seems extremely weak. Can Dean Baker really believe that the economy will do just as well with a cratered banking sector, defaulting on loans, screwing up a myriad of counterparties and frantically deleveraging? He also relies rather too much on a very crude piece of back-of-envelope calculation. Each of those four sectors will better close the huge gap in economic capacity that the slump has opened, if they can get finance on rational terms.  Their demand for finance is to some degree a self-fulfilling downward spiral - he won't invest, so I won't - but some fairly good projects are surely being ditched because funds won't be offered.

Whatever you favourite method - debt-equity swaps, a good bank, the Geithner plan, whatever - a functioning financial system will make a difference.  And, as the Economist says ('The curse of Politics'), this is one area where the political low-shots are actually getting in the way of a solution.  Geithner needs more money.  People like Dean Baker are stopping him. 

The Financial Times' excellent account of the British model defeats a few bugbears of the way 'we' do things. One great myth- we are all dependent on the City.  A naive reading of the Blue Book might confirm this: over £300bn of value added from Finance?  But a closer look at the numbers - hat tip to Ben Broadbent - finds otherwise.  That Finance column actually means "Finance and Business services".  And, looking closer: 

 "But Mr Broadbent calculates that industrial cleaning (which is also part of business services) contributes twice as much to national economic output as the City does."

And unlike the US, we did not have a construction boom here.  House building was always low (see the data here)  - hence a housing boom fed by growing numbers of households and constricted supply.   Quoting Broadbent again, “borrowing was the result of high house prices, not the cause of it”. 

All this means that we should be sceptical about grand statements of how the economy needs to be rebalanced by wise winner-picking ministers.  But Darling's help for housebuilding is welcome: we have a clear problem in this area, one that even the most myopic minister can see, and institutional Nimbyism stopping a rational market response in even the best of time. CentreForum has published on this before.