The administration's proposed limits on federal deposit insurance coverage indicate that the learning curve in Washington remains disturbingly flat.

Those in the administration arguing that deposit insurance caused the mess in the nation's financial system must also believe that health insurance causes cancer.Limiting the number of insured accounts or the dollar amount a single customer can have insured at banks is not the cure for what plagues the system. It only punishes those who had nothing to do with the collapse of the savings-and-loan industry or the troubles now facing banks.

The Bush plan will do little but make life inconvenient and worrisome for Americans resourceful enough to accumulate more than $100,000 - not all that much money these days. Even the offer to cover retirement plans up to an additional $100,000 is scant comfort to millions dependent on their life savings.

Meanwhile, an elegantly simple solution is being ignored. The government need only divide deposits into two classifications: insured and uninsured.

Banks could offer either or both to customers. For insured deposits, coverage would remain the same and would be backed by the full faith and credit of the U.S. government.

But banks could invest these federally insured deposits only in a short list of traditional, government-approved, risk-averse investments. That list should include homeowner loans.

Uninsured deposits, however, could be invested any way the institution desired. But depositors who placed their money in uninsured accounts would first have to sign a federal form acknowledging that they understood that their deposits were not covered by any government guarantee - actual or implied.

Should a bank or thrift fail under this "two-bank" system, the government would repay the insured depositors only and inherit a relatively secure portfolio of government-approved investments that could be easily resold.

Uninsured depositors, however, would just have to get in line with the bank's other creditors. No taxpayer bailout for them.

A free market is anything but risk-free. A two-bank system places the risk where it belongs - with the investor.

Such a system would not only go a long way toward insulating the federal treasury from loss, it would truly revolutionize the banking industry - an often-stated goal of this administration.

Bankers would offer competitive rates to attract uninsured deposits, something uninsured money market funds have done successfully for 25 years. More importantly, banks would have to convince investors and the marketplace that they are operating in a safe and sound manner.

Brokerage firms would surely turn loose a small army of skilled analysts to examine banks inside out. (This new force of private examiners would cost taxpayers nothing - itself a refreshing change.)

Banks would be forced to submit to no-nonsense marketplace accounting methods, not the Lewis Carroll accounting rules allowed by federal regulators.

Could unsophisticated bank customers get duped into placing their money into uninsured accounts? It might happen.

But the first lesson of capitalism is that the higher the promised rate of return, the higher the risk. I am not among those who believe that Americans are so primitive that they cannot understand this.