As the banking crisis worsens the government steps up its attempt to creatively keep those that are perceived as survivors alive. The weak are merged into the strong in order to avoid further strain on the deposit insurance fund but the strong turn out to be paper tigers. And so it goes for years.

You have probably already figured out that depiction is not of the current situation or the early 1930’s but rather of the period from roughly 1987 to 1990. It all seems to be playing out the same way again, though, and unfortunately our leaders, such as they are, don’t seem to be focused on that time period. I don’t know if its hubris, a belief that they can do it their way and better than it was done before or if they are so fixated on the Depression that they can’t see beyond that experience, but there is a path that worked before and we still have some of the human resources around that know how to execute it once more.

I’m speaking, of course, of a Resolution Trust Corporation sort of solution to this crisis. The RTC was created when it finally became obvious that propping up banks was not a viable solution. At that time capital was created out of thin air and weaker institutions were merged into supposedly stronger ones in the belief that they would be able to resolve the problem with toxic assets and emerge as viable financial players. It didn’t work because then like now the poison had seeped throughout the entire system. The supposedly stronger institutions weren’t strong at all, just able to hide their weakness better than the others.

Ultimately, the futility of the plan was so obvious that the political smoke and mirror game could go no farther and reality had to be faced. Fortunately, a few pretty bright men were brought into the game and proceeded to do what properly should have been done several years before. They took over the banks and they proceeded to strip out the saleable assets and then, logically, sell those assets in order to limit the overall cost of the debacle. To no ones surprise the assets were snapped up as there was plenty of money waiting on the sidelines ready to buy at a price that made sense.

Early on in our current crisis there was a lot of talk about resurrecting this model. It made sense but the idea seemed to drift away. Why that happened I don’t know but at this point in time the fact that it did is immaterial. We probably have gone past the point at which we should have brought the program out of mothballs. So let’s get on with it.

Forget all the financial engineering talk about nationalizing Cit and Bank of America and just put them into FDIC receivership. Make it plain that the FDIC has a blank check from the federal government, hire the best you can find to run and staff it and then proceed to restructure both. Wipe out the right side of the balance sheet, sell off the dicey stuff – there is plenty of money out there waiting to jump at a bargain – and figure out how to create a new, clean bank or banks that would probably fetch a pretty penny in an IPO.

This is not the rocket science that everyone is trying to make it out to be. Bill Seidman and Paul Volker are still around and could probably help a few good people get to the bottom of this much more quickly than we will at our current pace. Let’s not wait for another year or two to do what we will end up doing anyway.