The sight of Ireland’s top bankers traipsing in to meet finance minister Brian Lenihan last Friday with their lawyers in tow indicates just how far we have come since the chest-thumping of a few weeks back, when the bankers said that they could go it alone.

The most important guys in the delegation were not of course, the bankers, but the lawyers, on hand to advise on the structure of whatever deal might be considered. Given all the spin and the many conflicting stories that have been written about the banks, their bosses and the financial system, this fog sometimes obscures what’s at stake. If we get bank reform right, there is a chance that the economy will emerge quickly from the recession. More importantly, we can put the overblown and narcissistic concerns of the banking system behind us and focus the energies of the country on building for a future where Ireland makes things, fosters innovation and creates ideas which other people are prepared to pay for.

The dead wood of banking needs to be forgotten and the domestic banks need to be seen as boring utilities, which get on with the dull and reasonably straightforward job of extending credit. With this mindset and policy shift, one of the main incentives for getting this right would be that we could stop worrying about banking and concentrate on real growth industries, which are consistent with our desire to become a exporting nation once again.

This transition from a bank-dominated, housing-driven economy with its attendant property boom, to a technology-focused, innovative, outward-looking economy should be Brian Cowen’s and Lenihan’s medium-term prize. The banks and their travails are just something we have to deal with, rather than the be-all and end-all. The recapitalisation is all about the most expeditious way of moving on, rather than any overly important commitment to a sector in decline. This is why the next few weeks are important and the goal should be clear.

On the other hand, if we make a mess of the recapitalisation, any plans we have to alter our economy dramatically will be hostage to the banks. A messy, inconclusive recapitalisation will see us drip-feed precious national resources into this low-growth industry at a time when the rest of the world will be moving on to another phase of industrialisation, using brainpower and technology.

In order to think straight and make the right choice, we need understand that – no matter what happens. Inevitably, banking in Ireland will shrink as an industry. Indeed, the banking industry worldwide will shrink dramatically in the years ahead. It will shrink because it has to. It bloated itself over the last five years, gorging on cheap money and everything associated with banking. Credit and finance expanded ridiculously. AIB, Bank of Ireland and Irish Life & Permanent practically doubled their total loan books in five years, at a time when the real economy grew by about half that here – and much more slowly globally.

Let’s be clear about it, we are helping the banks, not because they are so crucial to the future, but because their travails prevent us from hard thinking and we want to put their troubles behind us. Yes, the banks are important for their credit function in lubricating the economy, but above and beyond that, the domestic banking system is an industry in decline – and certainly not one that a country trying to compete globally should be too concerned about. The banks are a distraction from the real business of planning for the next ten years of the economy.

This fact seems to be lost on the bankers who are still shamelessly swanning around as if they were the custodians of a growth business, which they are not. They lend money. There are no great technological breakthroughs associated with banking – no patents, no innovation and, ultimately, very little reason to believe that, in the future, this will be anything other than a functional dull business – much like a gas or electricity company. Returns will be in single digits and bonuses unusual.

In the global game of competition, the country that moves most swiftly to execute a recapitalisation can move on quickest. If you doubt this, just compare the two charts above. One shows the experience of Sweden after a massive banking crisis nearly felled the economy. The other shows what happened in Japan.

The Swedes moved swiftly. They fired the boards of the banks and, in a very unScandinavian move, culled the guilty top brass. The state injected its own capital – having borrowed to do so. The terms of this capital gave the state a share in the banks, which were converted into equity and which the state resold when the banks had recovered.

By acting quickly, the Swedish state got the banks to work for them, while the country focused on the real business of exporting, brand building and innovation. As you can see from chart 1, the Swedes suffered a modest, but short, recession in 1991, 1992 and 1993 – despite having bad debts, a bursting property bubble, a currency crisis and massive capital flight. By 1994, the economy was growing strongly and unemployment falling. This is the ‘biting the bullet’ option, where decisiveness is key.

The second chart traces the ‘muddling through’ scenario as experienced in Japan. Instead of a clean policy move, framed in the context of a long-term plan, the Japanese government and central bank sought to protect their friends in the banks. They tried to save every bank, kept the same management and, by guaranteeing deposits and reducing interest rates to zero, created zombie companies that were ostensibly open but doing no business. As you can see from the chart, Japan lost a decade with weak growth followed by recessions, then had anaemic growth and recession again.

Why did the two countries experience such divergent outcomes? The main reason is this: recapitalisation has to provide as much capital to the bank or the banking system as it needs to deal with its bad debts quickly. If there is enough new money, the bad debt provisions can be raised and the bank will still have a significant buffer on its rather arcane tier 1 ratio capital to allow it to lend freely. Therefore, at the first sign of life in the economy, the banks will be ready to lend.

In the Irish case, this crucially means that the multiplier effect of government spending increases, so that, for every euro of cash spent by the state, the positive amplification effect is significant. This is important for us, because the only demand in the economy in the near future will be from the state – and the state needs as big a bang for its buck as possible.

Once we understand this, we can focus on what’s really important for Ireland in the new, post-banking age.