March 16, 2009

It is clear by now we have to address the problem of our banking system, which is at the heart of our predicament. Without sound banks, credit doesn't flow and the entire economy is at a standstill.It is also clear we can't keep digging the hole we are in, throwing good money after bad by trying to bail out every insolvent bank and backstop every bad mortgage.Moreover, usurping private industry is an expensive proposition with dreadful unintended consequences.

Once a few banks are nationalized, shareholders will ditch all others, fearing that their stock would soon be worthless as well. These banks would then also need government support.The guarantees that the US government has already extended to the banks, and the large but in hindsight inadequate capital proffered them under the Troubled Assets Relief Program (TARP), is not dissimilar from those given by the Japanese government in the mid-1990's to resuscitate their major banks.