Good piece here from the New York Times on the zombie banks and what to do with them. Key section:

“Some of the nation’s large banks, according to economists and other finance experts, are like dead men walking. A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent. None of the experts’ research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are federally insured. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.
“But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department’s plan outlined this week. The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets. It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years.

Miracle cure? Certainly not, and the idea of government ownership (however brief) of the banks is not something to relish. Nevertheless I suspect that something on these lines would do more to prepare the preconditions for an eventual recovery (and that’s the best we can hope for) than large portions of a stimulus package which is in some senses a nationalization of a chunk of GDP – and one that is unlikely to be temporary, and is almost certain, before long, to have a very nasty impact indeed on this country’s borrowing costs.