Why the bank bailouts are doomed

They would almost certainly not support lending to hedge funds or providing money for leveraged buyouts, or do much merger-and-acquisition financing at all. You can pretty much count on the government knocking the financial system back to the Stone Age, or at least the 1950s -- a situation in which banks accepted passbook savings accounts from Mr. and Mrs. Smith and then made plain-vanilla loans to Mr. and Mrs. Jones.

If this is to be the case, then perhaps the new Treasury secretary should stop the charade with the second tranche of TARP money and certainly not contemplate TARP II and TARP III, as has been discussed in Washington. Just nationalize the banks and get on with the next phase rather than pour more money down a hole.

It's not like we don't already have nationalized businesses in the United States. We have Amtrak, the government-run rail system. We already have mortgage lenders Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) under federal control. We even have the post office, which could easily be a private business if it weren't determined to be a taxpayer-supported public utility by our forefathers.

The high price of life support

Personally, I loathe this neo-statism, which is a less objectionable term for socialism. The best course of action, which would have been the most painful in the short term but beneficial in the long term, would have been to force banks to open all their books to regulators and investors, allowing us to see which were solvent and which were not. Then the Federal Deposit Insurance Corp., which is sort of a mini-nationalizer, could have closed the bad banks and merged their assets into strong banks, and we would be halfway through the crisis by now.

Instead, the previous Treasury secretary, Henry Paulson, decided on this disastrous course of putting insolvent banks on life support at public expense, which has only led to a massive waste of money and time.

Now time is running out, because the next phase of the credit crisis is at the door: the part where we see a normal rise of loan defaults during a recession, further crushing banks' earnings. At the moment, defaults are running at 2.5%, but history shows they will hit 10%-plus over the next year or two as commercial real estate and business loans sour. This is why fixing the banking system will not end the recession; it will help only to smooth the path of a turbulent descent.

Get out your parachutes -- it's going to be a rough landing.

Meet Markman at The World Money Show

MSN Money's Jon Markman will be among more than 100 investment and finance experts sharing their advice on what to buy and sell in 2009 at The World Money Show in Orlando, Fla., Feb. 4-7. Invest four days dedicated to planning and refining your portfolio by attending some of the event's more than 300 workshops and panel presentations.

Admission is free for MSN Money readers. To sign up, call 1-800-970-4355 and mention priority code No. 012660, or register online.

At the time of publication, Jon Markman did not own or control shares of any company mentioned in this column.

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