Tim Geithner, as the face of the Administration, is increasingly under fire for what many are calling a failure to take the bold steps necessary to put our financial system back in order. And much of the criticism is from the left side, with some convergence between critics of the left and right. Paul Krugman’s latest column sounds the alarm from the left, and he does not mince words.

But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Krugman, and others, see the Administration as believing that an adequate mechanism for pricing the “toxic assets” that remain on the balance sheets of many banks would solve our problems. In line with that thinking comes a belief that these institutions are not really insolvent, but their assets are undervalued. And if you believe that it can bring you to some strange conclusions.

Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.

The idea that these institutions are not insolvent is a bad joke. They are insolvent, and they are zombies. Pretending that they are solvent does not make it so. And the Republicans have started calling for the Treasury to allow some of these institutions to fail, without being specific.

“Close them down, get them out of business,” Mr. Shelby, the senior Republican on the Banking Committee, told ABC’s “This Week With George Stephanopoulos.” “If they’re dead, they ought to be buried.” …. Mr. McCain, appearing on “Fox News Sunday,” echoed that sentiment without identifying any banks. Mr. McCain, who lost the presidential election last November, also accused the Treasury Department of avoiding the “hard decision” to let “these banks fail.”

I am not sure letting them fail is the right answer, but certainly utilizing the strategy successfully employed during the S&L crisis makes some sense to me. Nationalize the zombies, dump all of their questionable assets onto the balance sheet of an aggregator bank, recapitalize them, and sell them back to private equity. If the Administration is right and some of these assets will rise in value the aggregator bank will recoup capital from their eventual sale. If not we have scrubbed the system and moved the banking system out of its current danger. You would likely see a rally on the stock market if the financial sector believed that this issue was being dealt with comprehensively. Bold steps need to be taken before it is to late. Geithner was parodied on SNL for his perceived lack of action.

http://widgets.nbc.com/o/4727a250e66f9723/49b422397106aaff/49b3bb3a95c13b19/651b0958/-cpid/992305358b1e745c