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Financial crisis and the housing market: Dodging the issue

This crisis is only going to end when the root cause of the problem – the housing market – is fixed.

When Citigroup announced on November 24 that it had struck an agreement with the US government to isolate some of its most distressed assets, it was a stark reflection of the haphazard and indiscriminate nature of the federal response to this crisis.

If carving out bank balance sheets to create good banks and bad banks sounds alarmingly familiar, that’s because it is. Isn’t that what was suggested for the monoline insurers nearly a year ago? Isn’t that what Lehman Brothers was proposing to deal with its real estate exposure shortly before it imploded? Isn’t that kind of what the original Troubled Assets Relief Program (Tarp) was supposed to do?

Under the rescue plan for Citi, a pool of $306 billion of troubled assets has been identified for which the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp will mop up losses over and above $29 billion. Coming just days after Treasury secretary Hank Paulson announced that Tarp would no longer be used to buy troubled assets from the banks, it sent – at best – a somewhat confusing message as to just what the US government thinks is needed to fix the markets.

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