“Once to every man and nation comes the moment to decide…”

James Russell Lowell, the American romantic poet, editor of The Atlantic Monthly (now The Atlantic), and Harvard professor wrote this script for President Obama and the nation – in the mid-19^th century. Years later it became part of the Welsh hymn, Ton-y-Botel.

There can be no operating manual for a global crisis of unprecedented proportions. But there are already lessons to apply in the way that this economic Pearl Harbor, in the words of Warren Buffet, and the future of the U.S. economy, can henceforth be managed more decisively.

First, the utter severity has been consistently underestimated since early 2007 when HSBC, the largest bank in Europe, took an $11 BN charge relating in large part to its U.S. subprime portfolio. The implications of this signal were not seen until later that summer, when a $90 billion contraction in the commercial paper market occurred in August of 2007, which made it difficult for some companies to obtain short term funding. What has transpired since then is beyond the wildest imagination of some of America’s best minds: the unthinkable has already happened in the form of massive government intervention not seen since the Great Depression.

Second, there must be clarity and decisiveness about the rules of engagement – how much force the government is prepared to use as the remedy for financial markets – for private capital to return to the financial sector in particular. Protracted speculation about the future of Citibank and about nationalization in general has in recent months depressed both markets and people everywhere. Well-managed companies and private capital have suffered because of confusion over the limits of government power, the worst possible affliction for credit and capital markets. It is worse than bad news.

Third, government action must be timely, comprehensive, and bold: a 36 percent stake in Citigroup is the third such rescue action for that beleaguered institution but such actions have been incremental. The uncertainty about Citigroup’s future has caused its stock to trade as if it were to be nationalized, also negatively affecting the capital markets in general, particularly stocks in the banking sector.

The confusion started in March of 2008 when the Department of the Treasury assisted in the rescue of Bear Stearns – yet six months later, Lehman Brothers was allowed to fail and AIG, another leader in global finance, was effectively nationalized. To this day, it is really not widely known why there were different remedies for each institution. Like AIG and shortly before it was seized, Fannie Mae and Freddie Mac became wards of the state.

In the mayhem, systemic remedies were applied to maintain liquidity, the functioning of commercial paper markets, and to support the investment banks by granting direct access to the Federal Reserve. The investment banks left standing were converted into commercial banks, viewed as a safer harbor with more regulation.

The $700 billion Troubled Assets Relief Program, also known as TARP, and more unfortunately as the “Bailout” has also been confusing – a misnomer from inception. When it was enacted in October, the expressed purpose was to acquire illiquid or so-called “toxic assets” from the private sector. Not long thereafter, part of TARP was used for capital injections into selected banks, both weak and strong, irrespective of whether some banks needed or wanted that capital in the form of preferred equity. TARP has also been used as the source of relief for the automobile industry.

More recently, the focus of TARP and related rescue efforts has returned to acquiring assets of the banking system, potentially guaranteeing certain exposures, and creating a Public-Private Investment Fund to value and acquire the assets. The administration has backed off on setting up a so-called aggregator bank (“bad bank”) as a government controlled entity. There is also the new commitment to use $50 billion of TARP monies to prevent foreclosures.

The fact is that no one knows what TARP really stands for or what will happen next. TARP is not just about those in trouble – some banking companies that were healthy were forced to accept TARP preferred equity. TARP is about a lot more than assets, as it includes guarantees, equity capital positions, and helping the automobile companies and consumers. And there is the question of whether TARP provides relief by inserting the government into the affairs of private sector firms that did not need or want government assistance and the conditions that come with it.

President Obama should decisively emphasize several principles immediately. First, the President should stress that a well-functioning banking system with the availability of credit is not only essential to the nation’s economic stability and national security but also the first order of business of the Administration. The $789 billion stimulus plan, job creation, tax relief, infrastructure development, elimination of pork, homeowner relief, cleaner energy, fuel efficient cars, healthcare reform, income support programs, intervention in the AIG bonuses, the Middle East peace process, and softening of rhetoric toward Russia and Iran should be clearly subordinated now – to fixing the banking system, which is dysfunctional and commands limited confidence.

Further, the President should confirm that for many years, through the Federal Deposit Insurance Corporation (FDIC), there is a proven mechanism for bank interventions that is tantamount to nationalization – this is hardly a new concept. The FDIC will continue to intervene whenever there are banking insolvencies, protecting depositors in the process.

Finally, the President should indicate that acquiring toxic assets, providing liquidity and guarantees, and making selective capital injections are the other principal and continuing instruments of government intervention, as needed.

These directives will clear the air and support the premise of transparency, which the President has stated is a cornerstone of his Administration. Only then will the markets know the extent of government intervention in private markets.

A major unknown is how the public and private sector will collaborate to value the toxic assets. The focus of TARP changed in large part because the Treasury Department found it easier and more timely to take preferred equity positions than to try to establish a price for complicated mortgage backed securities and derivatives. At this writing, a private and public sector collaborative bidding process is now envisioned to determine valuations of of toxic assets, and this is a severely needed financial experiment. Opening a more competitive process for private capital to participate is nevertheless a needed financial experiment.

The free market will destroy capital when mistakes are made. But we have also seen the incalculable cost and opportunity cost of indecisiveness and confusion, preventing recovery in the credit and capital markets. It is certain that failing institutions will need to be taken over by the government and sold off in pieces when conditions permit. Shareholders will lose out at that point, but private capital should not be destroyed prior to that because lack of clarity over the role of government.

Colossal irresponsibility in Washington, on Wall Street, and yes, in Hometown U.S.A. has put us into the worst financial mess since the 1930s. This crisis should and must cause reflection on exactly who is entitled to what, if anything. Many countries have their national myths. For the British, it was the destiny of dominion; for the French, the grandeur and glory of la France; and for the Swiss, it is to be a good Swiss. For America, we must assess and decide whether the objective of our society, universal home ownership and the aspirations implied by that, are realistic and affordable.

Frank Schell is a former member of senior management of a major U.S. bank specializing in trade, treasury, and risk management. He serves on the Dean’s International Council of the Harris School of Public Policy Studies at the University of Chicago, and on the editorial board of the National Strategy Forum. His opinion pieces on global affairs and the world economy have appeared in the Far Eastern Economic Review, the Chicago Tribune, the American Spectator, and the National Strategy Forum Review.