Negotiators working overtime through the weekend agreed on a compromise Wall Street bailout. It should be approved by Congress and signed by the President as soon as possible. Fundamental problems remain with key aspects of the bailout but sufficient improvements were incorporated to justify passage, especially given the critical need to unfreeze credit markets. Failing to enact the bailout risks a major plunge in the stock market, more bank failures and undermining future economic growth. That said, the $700 billion bail-out is only a short-term fix. It avoids assessing the regulatory failures and shady private sector actions that contributed to the immediate crisis, and it does nothing about the root causes of the economic crisis. Looming over it all are the enormous difficulties that will come if we are to free the nation from the grip of the debt monster upon which we have made ourselves dependent.

The root cause of the present crisis is the federal government’s insistence beginning with passage of the 1977 Community Reinvestment Act that private sector lenders loosen their credit rules in order to give mortgages to buyers who could not repay them. Then in the 1990s and thereafter, an ill-advised government policy was transformed into a financial toxin as Fannie Mae and Freddie Mac used their status as government-backed corporations to backstop millions of such sub-prime loans and to encourage their  packaging in mortgage-backed securities as investment tools. Wall Street knew better than to build on such an economic house-of-cards, but did it anyway. The bottom-line remains that well-intentioned but ill-advised government policies are at the heart of the immediate economic crisis.