The U.S. government's plan to strip banks of troubled assets could force some firms to record large losses, but the move would help restore confidence in the banking system, the head of the Federal Deposit Insurance Corp. said in an interview in Tuesday's Washington Post.

This takes courage to do, but if we don't do it, history shows that this kind of mechanism -- recognize the losses, get at the root of it and move on -- this is how you jump-start the economy, she said in a discussion with Washington Post reporters and editors. The other option, just to park those assets on the balance sheet, I don't think that gets us very far.

The U.S. government plans to invite private investors to buy troubled assets, in part by providing financing at low cost. The extent of the federal subsidy was still under discussion, the Post said, citing Bair and other federal officials.

The administration hopes to find the right balance and announce the details within the next two weeks, the Post reported, citing people familiar with the matter.

Bair told the newspaper that the original plan to buy troubled assets faltered in part because of concerns about the cost.

What the pricing looked like, what the losses would be, I think that's what stymied this effort before, she said.

Bair told the newspaper that buying troubled assets would create a clear strategy for ending the government's intervention into the banking system.

The newspaper said Bair emphasized that banks forced to take large losses might not need more government money because, once cleansed, they would be in position to raise money from private investors.

The thing that really makes people gulp about this is the size of the hole, but we view that as a strength and not a weakness, she said.

A key issue that has derailed past plans to buy troubled assets is the large gap between the prices banks consider fair and what investors are willing to pay.

Bair said in the interview that the government can eliminate the issue by providing low-cost financing.

One of the reasons that prices are distressed right now is because of the lack of financing to make purchases, Bair said. The government, by providing low-cost funding, it will help to tease out that liquidity premium from the pricing and hopefully get the pricing a little higher.

(Editing by Jackie Frank)