A couple of weeks ago, Sen. Richard C. Shelby (R-Ala.) and Sen. John McCain (R-Ariz.) were talking about nationalizing America’s weaker big banks. Now they just want to kill them, according to their comments on weekend news shows.

Shelby told ABC’s George Stephanopoulos on Sunday that he doesn’t think a middle-of-the-road approach from the Obama administration to the banking crisis would work. “I think they’ve got to close some banks,” he said, according to the network’s transcript. “They don’t want to do it. We’re—we’re going down the same road Japan was going down….I don’t want to nationalize them. I think we need to nationalize them.” Stephanopoulos asked Shelby what he meant by “close,” and Shelby replied: “Close—close them down, get them out of business. If they’re dead, they ought to be buried.”

One might question Shelby’s diagnosis given his insistence that banks aren’t lending, but he was adamant.  

At least McCain didn’t suggest that bank lending had disappeared during his chat with Chris Wallace on Fox News Sunday. But he roundly criticized Treasury Secretary Timothy Geithner. “I don’t believe they’ve made the tough decisions,” said McCain. “Some of these banks have to fail….You can’t have zombie banks like the Japanese had.”

Thomas M. Hoenig president and chief executive officer of the Federal Reserve Bank of Kansas, joined the debate with a bit more than a sound bite last week. In a paper entitled “Too Big Has Failed,” Hoenig writes: “We have been quick to provide liquidity and public capital, but we have not defined a consistent plan and not addressed basic shortcomings and, in some cases, the insolvent position of these institutions.” He believes that the country is “drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”

What would Hoenig do? “To start the resolution process, management responsible for the problem must be replaced and the losses identified and taken.” Hoenig compares TARP unfavorably to the Great Depression era Reconstruction Finance Corp. The RFC at one point “held capital in more than 40 percent of all banks, representing one-third of total bank capital according to some estimates,” he writes. But the bad assets were written down to “realistic economic values,” management changes were made, then capital was injected “in the form of preferred stock.” The government recovered its investment “as a bank returned to profitability and full private ownership.” TARP, on the other hand, started without clear principles and “has proceeded with what seems to be an ad hoc and less-than-transparent approach” when it comes to too-big-to-fail in the case of banks.

The answer may not be easy, but it is straightforward: timely and clear resolution. “I would argue for constructing a defined resolution program for ‘too-big-to-fail’ banks and bank holding companies, and nonbank financial institutions,” Hoenig continues. He supports the government use of bridge ban, receivership or conservatorship powers to “take over the failing institution and continue its operations under new management.” For failing institutions “too big or too complex to manage well, steps must be taken to break up their operations and sell them off in more manageable pieces. We must also look for other ways to limit the creation and growth of firms that might considered ‘too-big-to-fail.’”

Gary Cady, president and chief executive officer of Torrey Pines Bank, shares this too-big-to-succeed concept. “Breaking some of the national banks into pieces ultimately is desirable,” he says: “Bigger is not necessarily better. But nationalization is not the most effective way to do it,” citing inadequate staffing at federal agencies as one of the issues.

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