No Silver Bullets Here

There is an easy compromise here: Require banks to disclose market prices right alongside their own estimates of "fair value." Let the investors decide which to rely on.

· Provide relief to homeowners, not Wall Street. This is the favored approach of liberals, who argue that dealing with the root problem-- families that can't make their loan payments -- is the fastest, surest, cheapest and most humane way to solve the financial crisis.

In fact, earlier this year Congress appropriated $300 billion to do just that, authorizing the Federal Housing Administration to refinance troubled mortgages if lenders agree to reduce the amount of outstanding principal and homeowners agree to share some of their future home-price appreciation with the government. In addition, the bill defeated by the House would have required the government to pursue a variety of loan-restructuring options to avoid foreclosure on any of the mortgages it acquired after it purchased troubled assets from banks.

Some have suggested that the government go further by providing direct subsidies to homeowners facing foreclosure. While that may sound like a politically attractive "trickle-up" strategy, it would be every bit as much a bailout for lenders as for homeowners. (Who do you think would end up with the money?) Moreover, one can only imagine the political backlash once those who kept up on their mortgage payments every month saw that their tax dollars were going to neighbors who had not.

· Recapitalize the banks, don't buy their lousy loans. Many academic economists argue that if taxpayers are going to rescue the financial system, their money should be used to recapitalize the banks in exchange for preferred stock or stock warrants, just as Warren Buffett did with Goldman Sachs and General Electric.

In fact, the much-maligned House bill would have given the Treasury secretary wide latitude to use any portion of the $700 billion to recapitalize financial institutions before they failed, in exchange for stock or stock warrants, just as the government did when it took control of Fannie Mae, Freddie Mac and AIG.

But recapitalizing the banking system would require much more than $700 billion, and involve the government in the ownership of hundreds of institutions. It would also be much less cost-effective than the Treasury strategy of jump-starting the market in mortgage-backed securities, which would bolster the finances of almost every bank, whether or not they wound up selling into the government-funded auctions for those securities.

Given the widespread fear of lending to or investing in banks until the full extent of their lousy lending becomes clear, there's a good chance that injecting large amounts of government capital wouldn't do much to attract additional private capital, or even get banks to begin lending again.

What we've got on our hands is a big, hairy, complicated mess. Beware of smooth-talking salesmen with hidden agendas peddling magic potions.

Steven Pearlstein can be reached atpearlsteins@washpost.com.