Banks Are Running Out of Options

Barry Bosworth, a senior fellow at the Brookings Institution, and a former economic adviser to President Jimmy Carter, says that one way or another, banks will need to acquire fresh capital. He believes, however, that once bad assets are removed from their books via the rescue plan, faith will be restored in their operations and viability. The transparency would perhaps allow for big investors to inject private capital into the companies, rather than the government.

"There are going to be other Warren Buffetts in this world who are going to be fighting to get a good deal," says Bosworth, noting the Berkshire Hathaway (BRK.A Quote) CEO's recent decision to acquire major stakes in Goldman Sachs (GS Quote) and GE (GE Quote).

Robert Shapiro, chairman of economic advisory firm Sonecon, and former undersecretary of commerce in the Clinton administration, says that the government will face several challenges in structuring a capitalization plan, including how to distinguish financial from nonfinancial companies. He believes the government should have instead started "jawboning" private investors into buying large equity stakes before injecting capital on its own.

"Is this the best course?" says Shapiro. "No, it's the course you go to when all others have been exhausted."

While the government could have waited to sniff out private investors' appetite for dirt-cheap financial stocks, some say that time is of the essence. Steven Kyle, a professor at Cornell University who specializes in macroeconomic policy, says that confidence in the government's ability to handle the crisis has already been sapped by its "piecemeal" approach to fixing the financial system, rather than outlining a comprehensive plan at the start.

"There are a lot of people who are averse to anything that smells like nationalization. And let's face it, that's what it is," says Kyle. "While as a trained economist I do sympathize with that view, there are times, and this is one of them, where you just have to step in and do it. What we're doing now is piecemeal, which erodes people's confidence that the government can solve the problem."