This Is a Financial Crisis Like Any Other—Treat it Like One

By Christian E. Weller | October 11, 2008

The markets are crashing. This is a standard financial crisis, as many other countries experienced over the past twenty or so years. In a crisis four risks materialize: default risk, maturity risk, interest rate risk, and exchange rate risk. We are spared from the last one since the dollar dropped well before this crisis. The problem is that we are not adequately addressing the remaining risks.

Default risk is always part of finance, but it spikes in a crisis. Borrowers cannot pay back their loans and bad loans accumulate on the balance sheets of banks, taking down financial institutions. The bailout was intended to solve this problem. But, the $700 billion Wall Street rescue only cures the symptoms, not the disease. It does not make it easier for homeowners to stay in their homes. To do that, we would need additional steps, such as bankruptcy reform, easier workout solutions for struggling homeowners to refinance their loans, and a second economic stimulus to boost household incomes.

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This article was originally published in Credit Slips.