I mentioned yesterday Jamie Galbraith’s tremendous article about restoring the rule of law in the financial sector. He posits that the crisis continues and won’t end until the sector stops dragging down economic growth – and the only way to do that is through investigations and criminal prosecutions.

How will this help the economy? The first step toward health is realism. We must first stop pretending that bad assets can be made good, that bad loans will someday be repaid, and that bad people can run good banks. Debt crises are resolved when debts are written down and gotten rid of, when the institutions that peddled bad debts are restructured and reformed, and when the people who ran the great scams have been removed. Only then will private credit start to come back, but even then the result of bank reform is more prudent banks, by definition more conservative than what we’ve had.

He calls for some other things, like policy-oriented public finance operations (a new Home Owners Loan Corporation, a Gulf Coast Reconstruction authority, an infrastructure bank) to finance the nation’s restoration. But mainly, Galbraith believes you need to spoon out the rot at the core of Wall Street.

The FDIC may get that opportunity.

Federal bank regulators have agreed to give the Federal Deposit Insurance Corp. unlimited authority to investigate banks, clarifying the agency’s power after questions about it during the financial crisis.

The agreement between the FDIC, the Federal Reserve and the Treasury Department clearly spells out the FDIC’s authority to make special examinations of banks. It updates a 2002 agreement, which blocked the FDIC from examining banks that were deemed financially healthy by their primary regulators, among other restrictions.

In reality, this means that the FDIC can more easily determine solvency. But it could easily follow the chain up and probe the criminal activity still happening at the heart of Wall Street. “Unlimited authority” means unlimited authority. And the FDIC has been one of the rocks throughout this financial crisis, with a solid leader in Sheila Bair who actually has a measure of independence and an aggressive regulatory streak.

Bair can start by investigating Bank of America after their admission this week that they hid debt to make their financial situation look better.

Nobody pop the champagne corks yet. But we may actually get to the bottom of the fraud in the financial sector.