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If you break the cycle of short-and-no-cover, you can win.

I know that wasn't the purpose of the Anglo-French plan that we were dragged into, but it will be the effect, and the effect will be electric.

Let's just take an obvious example: State Street ( STT). This is a longtime conservative trust bank that is an important custodian for life savings and for mutual funds. For a year now it has been under assault as an institution that has too much leverage in hard-to-value asset-backed instruments. The idea that a custodian could fall apart is something that shakes every money manager to his core and causes him to take his money out of cash and put it in T-bills. That's been going on for ages now, and I know money managers who are scared to death to keep their money "in the system," which is State Street, something that instills panic across the board.

When you hear that and you are a short-seller you know what to do: You plunk down $25 million to buy credit default swaps to wager against the firm's debt, then you buy position limit puts and then you short the stock along with all of the other like-minded souls you talk to every day. You get the stock rolling downhill, then you buy a second set of swaps, paying double the price -- doesn't matter what the vig is when you know you are going to win -- and then you call the media and you tell them that everyone's pulling their money out of State Street and the credit default swaps are spiking huge and then the media goes out and reports on it. The company is helpless to refute it as the problem is being caused by the sellers because it is pretty much business as usual in a very tough time, and the stock gets hit again. Other hedge funds get wind, they short it down further, longs panic and then the credit agencies put the company on notice because where there is smoke there must be fire. Then the clients pull as much money out as possible and voila, the end of State Street.

We have seen this run several times. Frankly, I don't know how State Street stayed in business.

Until this morning, the only policy that had been put in place to stop this destruction of capital by the shorts -- and I fully concede that State Street may have made mistakes, but I will not concede that those mistakes should have made it be wiped out -- was an out-and-out short-selling ban. That was ludicrous, but what do you expect from this SEC that eliminated the uptick rule right in the teeth of the greatest bull market and allowed naked shorting to go on illegally?

Now what happens? You can buy all the credit default swaps you want on State Street, the nefarious plan won't work because the debt you are targeting is insured by the U.S. government, so why would anyone then pay up after you to spike the debt? What's the point? You can't take out insurance against a company's debt when it is backed up by the full faith and credit of the U.S. government. By the way, the exact same trade was being put on against Bank of New York ( BK) -- that will end the targeting of that institution too.

This plan takes away the shorts as the primary allocator of capital in the system and returns it to the longs.

Citigroup ( C) had been a major target of the shorts but now it can raise all of the capital it wants. We no longer have to believe that Goldman Sachs ( GS) can be destroyed overnight by hedge funds buying swaps and then pulling their money out and telling the media about a prime brokerage panic. That can't make much money either.

Of course this is a radical solution, just gigantic, and it smacks of everything that the federal government under President Bush must have hated doing, as it is radically interventionist. It is the work of European countries that don't have the capitalist affinity we do. Some would say we communized the banks with these stakes.

I say what we did was what the government did with Lockheed ( LMT) and Chrysler years ago, successful investments that turned a profit for the U.S. These investments also anoint the banks so that can buy other banks, and they make it clear to the banks that got the money that they'd better lend it. This more than anything is directed on the strong side at JPMorgan ( JPM), which has a lot of capital to lend but hasn't wanted to, and on the weak side at Citigroup, which needs capital to survive, so it can go raise more capital -- and it will.

All of our Geithner/Bernanke plans with their dainty "collateral to Fed" nonsense and the troubled-asset plan from Paulson either took too much time or didn't inject any money. This is the new capital, the sovereign fund capital, that the system needs.

I think it takes us out of the abyss. No, not a reason to buy Caterpillar ( CAT) or Dow Chemical ( DOW), but a great reason to stop shorting the financials.

At the time of publication, Cramer was long Goldman Sachs and JPMorgan.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on "Mad Money" weeknights on CNBC. To order Cramer's newest book -- "Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)," click here. Click here to order "Mad Money: Watch TV, Get Rich," click here to order "Real Money: Sane Investing in an Insane World," click here to get "You Got Screwed!" and click here for Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he appreciates your feedback and invites you to send comments by clicking here.

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