In a way, we are seeing a replay of the 1980s: we are dealing with the consequences of a credit bubble as banks teeter and the economy slows down.

In today's Wall Street Journal [a paid publication], there's a great piece from some of the veterans of that era from former US Treasury Secretary Nicholas Brady, former US comptroller of the currency Eugene Ludwig, and former Fed Chairman Paul Volker.

They don't mince words. Simply put, they think the U.S. financial system is on the brink, and if action is not taken, we may see "the mother of all credit contractions."

What can be done? Interesting enough, there is a precedent: the Resolution Trust Corporation (RTC). This was a strong organization that allowed for the smooth unwinding of the S&L industry during the early 1990s.

Essentially, the RTC had full backing and a clear mandate. And when it completed its job, it actually closed down (yes, that's something that rarely happens with a federal agency).

As for the current situation, an RTC organization would be a buyer of distressed securities. Ultimately, this will encourage more trading, liquidity, and hopefully, more economic activity -- especially in the housing sector.

Unfortunately, policy makers are currently taking an ad-hoc approach, putting out one fire after another. How can this engender confidence? If anything, investors are waiting for the next financial institution to implode, which just becomes a vicious cycle.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

Back to the 1980s for a solution to the financial meltdown? originally appeared on BloggingStocks on Wed, 17 Sep 2008 10:35:00 EST. Please see our terms for use of feeds.