(A quick reminder for readers who wonder why the banks shouldn’t be allowed to go bankrupt, like any other company that made the kinds of mistakes banks made. The answer is that the banking system is the engine of the economy; if banks stop functioning, economic activity will grind to a halt. Indeed, at least some of the pain we are going through now is the result of the banking system’s not functioning properly.)

The key point here is that any systemic solution has to deal with the bad assets, once and for all. They need to be properly valued and they need to be isolated. “How do you know how big the hole is on the balance sheet of Citi until you have a decent valuation?” asks the Princeton economist Alan Blinder. That is the primary reason the banking system can’t attract private capital and has to rely on the government  no prospective investor has any idea how deep the hole is. That will only start to become clear when these assets are either written down to zero (unlikely) or start trading again.

The second point is that the next round of recapitalization  and it now appears the next $350 billion of TARP money is going to be used primarily for that purpose  needs to encompass the entire banking system, and needs to be truly enormous. Simon Johnson, a professor at the Sloan School of Management at M.I.T., and a well-known blogger on banking issues, says he believes that it will take $1 trillion to really do the trick  money, presumably, the government will get back once the banking system is healthy again, and private capital comes in to replace the government’s capital.

“It’s not rocket science,” Mr. Johnson said. “When you do a recap, you need overkill. But then, you also have to take the bad assets off the books.” In the recent deals it cut with Citi and Bank of America, the government tried to “ring-fence” bad assets  that’s its phrase, not mine  by agreeing to absorb losses on securities that have been identified as toxic. But that is still a piecemeal, one-bank-at-a-time approach.

Mr. Blinder, a former Fed governor, told me that he thought the government should be thinking about the entire problem differently: “It should go market to market instead of institution to institution.” He pointed to actions by the Federal Reserve as a possible model: it has revived the commercial paper market by creating a commercial paper funding facility  and has done the same with several other important debt markets. In effect, it is guaranteeing the smooth functioning of those markets. And that approach has worked.

As it turns out, Ms. Bair  who, thankfully, will remain the head of the F.D.I.C. in the new administration  has been thinking along the same lines. She, Mr. Bernanke and Treasury officials have begun talking about a new kind of bank, one that would be created and capitalized by the federal government, and whose sole purpose would be to buy up bad assets. Instead of ring-fencing bad assets one bank at a time, it would warehouse them in one place, much the same way the Resolution Trust Corporation did for real estate assets during the savings and loan crisis.

Would the sale of these assets cause further write-downs? Of course. That is why you would need to throw more capital into the banks as part of a systemic solution. But at least you would finally know how deep the hole is. “You would have to mark the assets at the price they were selling for,” Ms. Bair told me. “I think that is an advantage.” At long last, there would be some certainty. Private capital won’t return to the banking system until that happens.