It's an axiom constantly repeated by politicians, the Federal Reserve, and the media: economic recovery hinges on job creation.  Yet no one has come forward with a specific plan, so we are left with an official unemployment rate hovering at nine percent or higher.  (Keep in mind that this already unacceptable figure further fails to account for the underemployed and those who are no longer looking for work, making it too low in all likelihood.)

While no one disputes the urgency of deficit and debt reduction, sustainable job creation is every bit as important if we are serious about achieving a return-to-growth economy.  Without job growth, we cannot conquer the debt super-cycle plaguing all Americans.  Yet we remain stuck in neutral with dire projections of no increase in the employment rate for several years despite massive federal stimulus efforts and Federal Reserve policies supposedly designed to help us out of our jobless misery.  True, the United States created 1.1 million jobs in 2010 according to the Bureau of Labor Statistics, but that is woefully short of where we need to be.

Small and mid-sized businesses have long been recognized as growth engines following prior United States recessions.  Yet the ignition for these engines -- investment in research and development, new product initiatives, and expansion -- is nonexistent because of oppressive bank debt.  Instead, what little cash flow is available has to be directed to principal and interest payments, leaving us with a painful and predictable economic scenario: company revenues stagnate because fewer goods and services are purchased by ever more cautious consumers.  That means no revenue growth, no expansion, and no hiring.

After three difficult years, most businesses have likely given up hoping for a quick return to a growth environment.  Burdened by high bank debt with credit lines fully drawn, they have no further borrowing capacity and probably insufficient collateral for repayment.  What's worse, their creditors know it.  The banks' response, though, has not been to restructure debt and recognize loan losses when the debt matures.  Instead they have chosen to "amend and extend" the maturity date of the debt.  Since companies pay interest on the debt, banks can treat the notes as performing obligations, thereby avoiding higher loan loss reserves.  This practice has become so pervasive that some distressed investors now refer to this practice as "amend and pretend."

Instead of taking their medicine, banks have decided to kick the can down the road, with apparent benign approval by Federal Reserve and U.S. Treasury auditors.  Distressed asset buyers complain that banks would rather hold on to the distressed note than take the required loss on the sale, thereby avoiding a charge against capital.  In addition, unlike other cycles, little market activity exists in the normal buying and selling of small- and middle-market toxic assets on the books of banks.  As a result, an increasing number of companies and banks that once had life have now become, for all intents and purposes, zombies -- the "walking dead."  Zombie companies cannot borrow the funds that would be their sustenance, and the zombie banks can't lend.  This is why amending and extending loan maturity dates offers nothing for an economy in need of restoration.

In the meantime, nonperforming loans and reserves for loan losses have increased substantially since the start of the great recession.  If the actual losses were realized, including those related to commercial real estate loans, the financial system would be put at significant risk of collapse.  Edward I. Altman, professor of finance and director of the credit and debt markets research program at New York University's Salomon Center, estimates the current face value of this defaulted and distressed debt approximates $705 billion as of December 31, 2010.

One need only study economic trends of the last three years to conclude that extending loan repayment will not bring value back -- not during a sputtering economy.  Yet there is an option, and although it may seem unrelated, its model could serve as a foundation for job creation.  It's the Resolution Trust Corporation, the entity created by Congress in the late 1980s to resolve the savings and loan crisis.  According to the Encyclopedia of Business, the RTC managed approximately "747 S&L closures and sell-offs valued at $460 billion in assets and $225 billion in deposit liabilities" before absorbing into the FDIC and permanently closing in 1995.  The Heritage Foundation estimated costs to taxpayers from RTC operations and S&L sell-offs at $124 billion.  The speed at which the RTC operated allowed the economy to quickly recover.

Obviously, there is no way either taxpayers or Congress will stand for that kind of cost on top of an already bloated deficit.  But under this proposal, they won't have to.  That's because this reconstituted RTC would be funded solely by proceeds from the sales or workout of toxic notes provided by the banks.  No taxpayer dollars are necessary.

Here's how an RTC option would work.  The banks would take the toxic loans off their books and turn them over to the new RTC at par value.  Hedge funds, insurance companies, and private equity firms can evaluate what these assets and loans are worth and price them accordingly, leaving the RTC to sell the notes either individually or in pools.  "Dry powder," the uninvested capital in private equity, insurance companies, and hedge funds, can provide the liquidity necessary to purchase these distressed assets.  Estimates of these uncommitted funds are as high as $1.5 trillion.

Should the sale come at a loss, the cost will be absorbed by the banks and not the taxpayers.  So will the RTC's operational costs.  Even if these losses and costs are amortized and charged back to the banks over a three- to five-year period, a revived economy in the short term is a better result than the economically inert environment we have today.

Removing these loans from the banks frees them to offer more business loans, enabling the 5.9 million small- and middle-market American companies to start planning for growth and hiring people -- the whole point of eliminating the heavy bank debt that stymies growth at present.  A fresh start, including more realistic company capital structures, is far more preferable than the quagmire these companies and their managers face today.  It's the very incentive essential for a job creation environment.

The point is that the banks today are not voluntarily writing down their toxic assets.  Instead, they are amending and extending to avoid said write-downs.  An RTC solution would work out or sell these notes, most likely over a four- to six-year period.  During this time, banks would be able to make new loans, the former zombie companies could grow again, and, as a result, the banks would become healthier because they would be properly supervised by the Fed and U.S. Treasury auditors.  As the banks become healthier, they can then absorb the losses imposed on them through the restored RTC.

Understandably, no one wants to see another government agency, but at the same time, no one can argue that what we have at present is working.  The new RTC gives us the opportunity to resolve the job-killing bank debt burden without turning it into another taxpayer bailout.

The banks knew the risks when they made these toxic loans.  They should be held responsible for cleaning them up.  The Federal Reserve and United States Treasury should forego consideration of new regulations and simply manage and enforce their existing regulatory practices, which would force regular write-downs by banks of future toxic assets.  This new RTC would enable the routine enforcement of bank capital ratios and help us avoid future threats to our entire financial system.  Once it completes its work, the RTC can quietly ride off and disappear into the sunset, just as its predecessor did sixteen years ago.

David L. Auchterlonie is the Chairman and CEO of The Scotland Group, Inc., a boutique corporate turnaround management firm serving middle-market and lower-middle-market companies.  He is also past world chairman of the Turnaround Management Association. Contact: davida@scotlandgroup.com or 949.673.7750