Instead of a bailout, why not table-turning workouts?

Almost everyone, it seems, is drinking the bailout Kool-Aid mixed up by Treasury Secretary Paulson, Federal Reserve Chairman Bernanke & Co. The Bush administration is asking Congress to approve its $700 billion plan to buy up "bad" loans from financial institutions so credit -- the lifeblood of economic growth -- can start flowing again. Or so the bill writers devoutly hope. It looks as if the Democratic-controlled Congress will pass the proposal, or something close to it. But is this quickly produced ad-hoc concoction the way to go?

Yes, say advocates, who argue that such drastic action must be taken to avert an economic depression that likely would be global. But just how "bad" are the written-down loans? Under "mark-to-market rules" of Fair Value Accounting, they're very bad. That's because the assets collateralizing the loans are -- in most cases -- residential real estate. Homes, as everyone knows, have been rapidly declining in many key markets, where most real estate transactions occur. But over the next several years, deflated home values should come back -- at least to the point where many of the "bad" loans to buy them would become tolerably "good" loans. That point of inflection would mean the financial institutions holdings the loans would not have big write-downs weighing their books, and thus not be sinking as defined by accounting rules.

So why not let this market process take place -- with the government being ready to provide targeted cash aid to financial institutions when each of them needed it? The aid would come with the traditional loan "workout" strings that financial institutions impose on business lenders who fall behind on their payments, but have a reasonable chance of regaining their credit-worthiness. In such cases, lenders order failing borrowers to give up all their liquid assets -- including, even, the Rolex watch on their wrists -- and impose severe cost cutting within their companies. Now the tables would be turned, and it would be the financial institutions who would have to go through the workout. Institutions with reckless records of speculative loan churning would get no deal permitting them to stay in business. Their loans would be assumed by the government, and their businesses would be shuttered or sold whole or piece-meal through receiverships. Liquidation would include no golden parachutes for the top executives who created the mess.

The administration bailout is nowhere as discriminating. It bails out every institution, and thus rewards the most reckless with everyone else.

Selective assistance would not require as much money as the bailout plan's $300 billion because the government wouldn't be buying in one fell swoop all the written-down securities. It would also send a strong message to financial institutions -- we will help you work through your problems, but we won't wave them away. Isn't that the message that both lenders and borrowers need to hear?