End the war on reality

-- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft

LONDON (Reuters) - Having conclusively lost, it is about time that officials on both sides of the Atlantic propose a truce in their long running war on financial reality.

The plans to inject government capital directly into ailing banks, to guarantee further bank deposits and to stand behind interbank lending are excellent first steps. They implicitly recognize the seriousness of the situation and, by putting governments' deep pockets directly behind proposals, they win confidence by concrete action rather than obfuscation or misdirection.

But continued assaults on mark-to-market accounting standards and short sellers show that many in positions of authority still apparently think that suspension of disbelief is the key to fighting the crisis.

The approach now is a heck of a lot better than it has been recently.

Britain stands out for aggressively recapitalizing its banks in a 37 billion pound ($64 billion) program and for starting a bank borrowing backstop plan likely to set the pattern for Germany and France. This isn't sufficient in itself, but it cuts to the heart of the problem: bank solvency and liquidity. It also provides a measure of protection to the comparatively innocent (taxpayers) and a measure of punishment to the comparatively guilty (shareholders and bank employees).

Euro zone countries too took positive steps: guaranteeing new bank debt issuance temporarily and committing to recapitalize "systemically" important banks if needed.

Even the United States is on board and will use some of its $700 billion bailout package to inject capital into banks, money that will be far better spent than if it had been used to buy up lousy debt at farcical "hold-to-maturity" prices. (Yes, I realize they were going to use a sophisticated auction process to ensure that fair prices were paid for debt. No, I don't think that was going to work any better than the sophisticated processes that came before.)