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Matthew Richardson and Nouriel Roubini argue in the Washington Post today that the U.S. banking system is insolvent to the tune of $400 billion, and nationalization is the only answer.  Here’s their advice:

First, and this is by far the toughest step, determine which banks are insolvent. Geithner’s stress test would be helpful here. The government should start with the big banks that have outside debt, and it must determine which are solvent and which aren’t in one fell swoop to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions….Third, once an institution is taken over, separate its assets into good and bad ones….Fourth, merge all the remaining bad assets into one enterprise.

….Basically, we’re all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let’s pull out the bazooka and be done with it.

I expect this to become a pretty mainstream opinion over the next few weeks, and once Geithner’s stress testing is finished he’s going to come under tremendous pressure to make the results public and do exactly what Richardson and Roubini suggest.  Pretty soon, even America’s bankers will be capitalists, whether they like it or not.

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