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Heads have rolled, huge write-downs have been taken, but still equilibrium has not returned to the debt markets. Unless the credit meltdown can be halted, a recession looms. Consumer spending has been recently responsible for roughly 70 percent of U.S. gross domestic product, and it is, in turn, financed today primarily through securitizations. Thus, destabilize the financing of consumer spending and the economy falters.

So far, the response of policymakers has largely been to fashion accommodative monetary policies that will either bail out imperiled financial institutions or relieve overextended homeowners. Such policies may alleviate the symptoms, but they will not cure the liquidity crisis that is paralyzing the debt markets. By definition in a liquidity crisis, trading slows and prices become deeply discounted because most investors cannot determine the real value of the affected assets. Normally, the crisis ends only when the “smart money” offers deeply discounted prices at which risk-averse holders are willing to sell their gridlocked securities. But little movement in this direction has been visible.

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