Why we need more information

Here is exactly the problem (from Floyd Norris's column today in the New York Times):

Each bank knows the games it has played in valuing assets — or at least could have played — and is loath to believe the balance sheets of other banks. That suspicion has chilled the interbank lending market.

The financial crisis has long moved beyond the realm of economics; it has become all about psychology. Specifically, it is about the psychology of uncertainty. Hence the need for clear information – not new attempts to cook-the-books.

As Norris goes on to say:

The government could be selective in deciding which banks get the cash, and it could impose conditions on those that seek the money. Those banks could be required to come clean about the risks that they have taken in dubious assets, and to write those assets down to what a willing buyer would pay now.

With that information, the government may decide to let some banks fail. But the others, in which the government does invest, would have a government seal of approval that was backed up by cash.

Coming clean about their books -- that would be the right thing to do.