The Obama administration wants banks to use some TARP money to increase consumer and business loans. Or so they say. There’s talk of stricter controls and oversight for TARP II. But exactly how the Obama administration will force banks to start lending more money to consumers and businesses isn’t clear. Does the Obama administration really want to do it?

Banks know that with the economy stumbling and more and more businesses going under and people losing their jobs, defaults on mortgages and unpaid auto loans and credit cards increase. Delinquencies rise for all types of consumer credit. With fewer people buying, business lending gets riskier. In such an environment, banks loan less, not more. They hoard cash for an even rainier day.

A better idea is to help consumers pay the debt they already have through mortgage restructuring or mitigation and economic stimulus through job creation. If you lose your job, the best way to keep paying your mortgage, car note and credit card bills is to get another job. At the same time, government can twist lending institutions and investors to renegotiate consumer debt, like threatening them with cram-downs, which already seems to have worked. Use TARP to help banks stay solvent, while economic stimulus creates jobs so people can pay their bills, then debt restructuring makes those bills easier to pay. That will loosen up credit – slowly, but in a sustainable way. Anyway, do we really want to increase consumer and business debt right now?

In return for bailing out banks, let’s get the biggest equity stake possible. I’m not afraid of the N-word: nationalization. We don’t nationalize like Venezuela does; whatever chunk of the banks that taxpayers buy will be sold back to private investors later on. The key to whether Obama’s bailout of banks is a success is whether the federal government recoups its losses, or turns a profit, a few years from now. If it does, it will all be worth it.