We already tried this in the 1930s and that didn't go so well. Banks are different than other business because they act like a heart to pump cash through our economy. Allowing banks to fail would only make it harder for new businesses to find cash and for people to trust saving their money.
Actually in the 30s we did exactly what we're doing now, deflating our currency, passing a bunch of legislation to prevent competition, disallowing people from holding solid investments, paying people to be unproductive, a massive expansion of government predicated upon a weird interpretation of the commerce clause, and surprise surprise, it's having the same effect it did in the 30s.
Keep in mind that the economy 'failed' in 28, but it wasn't until FDR that things really got bad.
Actually, we tried this in the depression of 1920-21. We recovered so quickly that the depression is hardly notable enough to make it into a history class.
