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Now That We're Back Where We Were Three Weeks Ago …

With the revised Paulson plan triumphantly headed to the House for what looks like a better-than-even chance of passing, let's not forget that enactment of the bill is only the first step in a long journey. Having hopefully stabilized (if not opened up) the credit markets, we now need to address the cause of the crisis itself.

In a way, all the Paulson plan does is get us back to where we were a few weeks ago, when we were focused not on bank closures but housing foreclosures. And that should still be the focus. Unstable mortgages are the reason all these mortgage-backed securities are falling apart. Of course, "where we were a few weeks ago" was a months-long stalemate, with legislators and economists unable to agree on a plan to help responsible homeowners without bailing out irresponsible risk takers. But there's a silver lining here: Maybe now policymakers will set aside their concerns about moral hazards and recognize the risk that unhealthy mortgages pose to the rest of the economy. The question is what to do about them.

As has often been the case these days, Columbia Business School Dean Glenn Hubbard, former chair of Bush's Council of Economic Advisers, has been a voice of reason on this dilemma. In today's Wall Street Journal, he co-wrote a piece with his Columbia colleague Chris Mayer proposing that "all residential mortgages on primary residences ... be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years)." They argue that we should then place them with Fannie Mae and Freddie Mac. Such a move would directly help out homeowners, and in turn reassure credit markets worried about the wobbly mortgages underlying all those asset-backed securities we've heard so much about.

This isn't chump change; as the pair notes, the total negative equity out there is about $593 billion. But here's where the Bush administration could learn from its mistakes. Instead of giving the public the worst case scenario--$700 billion, in the case of the Paulson plan, is only what we'd pay if most of the purchased assets fell apart--it should explain why a mortgage-refinancing plan wouldn't soak taxpayers. Refinancing itself would help a lot. And the credit stimulus that such a plan would provide would go a long way toward boosting the economy and thus giving homeowners more cash. Hubbard and Mayer also recommend capping individual write-downs to $75,000, which would reduce the potential price tag to $338 billion right away. That, and the fact that the plan would directly aid struggling Americans, should ease its way through Congress.

This isn't the final step, of course. If one looks at the economy as a heart-attack patient, the Paulson plan is the CPR. A refinancing plan would be the bypass surgery and recovery. Beyond that, just as a heart-attack survivor needs to make serious changes in diet and exercise, we need a thorough round of regulatory reform--including a restructuring of the regulatory system--to help make sure this doesn't happen again and to prepare ourselves for the unknown tumult that a globalized financial infrastructure will bring.

--Clay Risen