Godfatherly Advice for Financial Crisis

The Bush family consigliere wants to make American banks an offer they can't refuse.

Writing in the Financial Times, James Baker advocates that, after subjecting them to stress tests, the government divide banks "into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganized and recapitalized, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage."

Baker, who was Reagan's Secretary of the Treasury, warns against repeating Japan's mistake in the 1990s of providing guarantees and piecemeal government bail-outs that created “zombie banks,” neither alive nor dead, and led to feeble economic performance for a “lost decade.”

There has always been a Corleone streak in Baker's approach to problem-solving. Toward the end of the first Gulf War in 1991, as Bush I's Secretary of State, he warned Iraq that use of WMDs would bring nuclear retaliation and, in the Florida recount battle of 2000, he played legal hardball to get W into the White House.

If the consigliere is now advising them to get tough with the banks, the Obama Administration might do well to give Baker's approach more consideration than the second President Bush did with his advice from the Iraq Study Group before going ahead with The Surge.