Rescuing the American Economy

Ed Paisley

What happened?

We got there really through about 10 to 15 years of consistent and increasingly unrestrained deregulation of the financial services industry. This picked up speed in particular in the past eight years, which combined with the conservative idea that one should not supervise financial institutions too closely, allowed them to gear up to leverage themselves to the hilt with too much debt, and in doing so jeopardize the U.S. financial system.

Why does it matter? And what can we do?

Well, it matters now because of the manner in which the financial institutions packaged up and sold the U.S. housing market around the globe. Now we face a global financial crisis because nobody knows the true value of all of these homes because they've been packaged up into different kinds of mortgage-backed securities and bonds, and no one can actually calculate what an individual house is worth. And that's proving to be a real problem across the financial system. And what the problem is now is we have to somehow disentangle all of those mortgages so they can come back to be whole so they can be refinanced and then pushed out in to the marketplace again.

I am concerned that the federal government will take the wrong steps and they will solve the immediate crisis, which is the financial markets, but will do so in a way that is neither fair nor effective over the long term. What has to happen is the U.S. housing market has to recover for the entire system to get back on its feet and to get our economy back on its feet. If the U.S. Treasury simply goes out and buys up all the bad assetsÑbad mortgages, bad mortgage-backed securities that are in the portfolios of banks and investment trustsÑthat's not going to solve the problem. The underlying problem is we have to figure out a way to put a floor under the U.S. housing market. We can only do that by restructuring the individual mortgages in different neighborhoods so that the neighborhood price of houses can recover so there aren't foreclosure signs jumping up all over the place. If that happens, then this will be a good package and that money will be well spent. And also, if the restructuring is done well, the tax payers will not lose.