While we are all distracted by the game of chicken being played with the debt ceiling and Michael Bachmann’s latest verbal insanity there is still a situation with the global economy being played out and as this piece by Irwin Stelzer points out, it ain’t about Greece or Spain or Italy. It’s about the banks.

What we have come to call the Greek crisis is, first, an international banking crisis. Like Lehman Brothers, Greece is definitely not too big to fail. It is too interconnected to fail, too interconnected to the international banking system, too interconnected to the political ambitions of those who have spent decades replacing the system of nation states with a united Europe.

Start with Greek banks, which hold €70 billion ($99.3 billion) of their government’s sovereign debt. The Economist estimates that if Greek banks were required to recognize the fact that markets are valuing Greek government debt at about half the value assigned to this paper on their books, shareholders would be wiped out and the banks would have to scramble to raise substantial new capital. Depositors would scramble to get their money out, and the European Central Bank would have to torture its rules to find a way to continue accepting Greek bank IOUs in return for the cash needed to maintain the liquidity of the Greek banking system.

Other financial institutions would also find life more difficult. Many of Germany’s under-capitalized banks would be hard hit if they were forced to recognize that their books are in good part works of fiction, with IOUs of Greece and its banks and businesses recorded at values that have no relation to their true worth.

German banks are not alone in their predicament: The rating agencies are already expressing concern about the exposure of three French banks and some 29 Italian banks, and the governor of the Bank of England has called the problems of overly indebted euro-zone countries the “most serious and immediate risk” to the U.K. financial sector. It is also obvious that we have no clear idea of the exposure of U.S. money-market funds to Greece’s insolvency, or of insurers—remember AIG, anyone? That’s why $51 billion has been pulled out of those funds in recent weeks by nervous investors, why America’s banks have become reluctant to lend to their European counterparts, and why the Fed is asking U.S. banks about their exposure, including credit default swaps written on European banks.

Greece’s problem has also revealed another crisis—a crisis of governance. The Tower of Babel that is euroland governance is collapsing. Markets have gone from puzzled to incredulous and on to near-panic as Herman Van Rompuy says one thing, José Manuel Barroso another, Jean-Claude Trichet another, Angela Merkel still another. Their failure to sing from the same hymn sheet is damaging—no, destroying—any confidence markets might once have had in the competence of the euro-zone governing class.

So as the various leaders of these countries and Obama attempt to save these institutions piece meal and try to hide the reality of the situation – which has not really changed much since the 2008 meltdown – all they have managed to do is confuse investors, outrage the public and make a bad situation even worse. Instead of attacking the problem head on.  Now I only agree with a few of Irwin Stelzer’s suggestions, the others are typical Reaganomic BS. Here are the one I agree with.

• force the banks to recognize that much of what they count as assets aren’t, and to recapitalize, even if this slows lending and growth in the short term;

• recognize the need to speak to markets with one voice;

• admit that perpetual dependence on the generosity of Germany is not a sustainable policy;

And I would like to add for us at any rate, break up this monoliths and get rid of their casino style financial dealings. But most of all tell them they no longer call the shots.