Confidence In Policymakers Will Continue To Deteriorate As Their Ill-conceived Solutions Continue To Fail.

So say's Martin Wolf, chief economist of the Financial Times, who believes that the U.S. Banking system is insolvent and requires recapitalization.

Arguing today's toxic assets are "fundamentally worthless" - and there's lots more losses coming - Wolf says the lack of political will (or outright cowardice) to admit to reality means "we're really in trouble." Why? Because confidence in policymakers will continue to deteriorate as their ill-conceived solutions continue to fail.

Once policymakers (ultimately) agree insolvency is really the underlying problem, there are two options for dealing with the banks:

* Nationalize them, and then inject government capital as the U.K. government has started to do with RBS and Lloyds. (a.k.a. The Swedish Solution)
* Put them into FDIC receivership or force them into bankruptcy, whereby common stock and preferred debt shareholders get wiped out and "senior" debt holders end up owning the banks.

source

(There is video at the source that is worth watching)

If Wolf is right it would explain the shift in emphasis in the TARP program from buying up assets to recapitalization, but that would be an incomplete solution since they still haven't shed the bad debt.