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Recovery depends on solid banking

BANKERS DON’T have a lot of fans these days. Their credit requirements have risen, they are stingy with loans and they aren’t paying much on deposits.

On top of that, they suffer from their association with the likes of John Thain, former head of Merrill Lynch, who lavished money on bonuses and office furniture in his last months.

But the real problem doesn’t lie with the perverse instincts of the people running our financial institutions. It lies with the bad debt they took on, particularly in untried mortgage-backed securities, during the real estate boom of recent years.

One component of any broad recovery has to be putting the banking sector on a solid footing. That was the idea back in September, when the Treasury Department proposed a $700 billion plan, which was supposed to rescue banks by purchasing assets that had lost value. But faced with spreading turmoil, Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke decided instead to use the first $350 billion installment mainly to invest in banks to shore up their capital base.

But recapitalization is worrisome, because it means the federal government is now part owner of what are supposed to be private, capitalist institutions. Not to mention that the capital injections didn’t banish the paralyzing uncertainty created by the bad paper.

So now the Obama administration apparently is returning to the original idea behind the Troubled Assets Relief Program (TARP) – cleaning up bank balance sheets by relieving them of these securities. The model is the Resolution Trust Corp., which was set up to take on and eventually sell off the assets of insolvent savings and loans in the 1980s.

This idea is better than the status quo.

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