The rule of governments or the rule of markets

As the Eurozone crisis has escalated, one of its central themes has been the choice between the rule of governments or the rule of financial markets.

To date, the Eurozone has chosen to side with the rule of financial markets.  Democratically elected governments in Greece and Italy have been replaced with technocrats.

I find this surprising in light of the fact that the rule of governments is easily maintained if the governments simply require the banks hosted in their countries to fulfill the banks' safety valve function between the excesses of the financial markets and the real economy.

Fulfilling this safety valve function means that banks must recognize their losses. (This blog has shown that this would not harm the payment function performed by banks or reduce access to credit -- examples included both Security Pacific/loans to less developed countries and the US Savings & Loan crisis.)

Requiring banks to recognize their losses is bad for bankers' bonuses.  However, that is a far better outcome than forcing out democratically elected governments in favor of technocrats who will do everything they can to preserve meaningless bank book capital as a positive number.