**FROM THE DESK OF CONGRESSMAN GEORGE RADANOVICH**

CALIFORNIA\'s 19th CONGRESSIONAL DISTRICT

Economic Crisis

Q&A: How Did We Get Here?

**Q: What is the root cause of this economic crisis?**

**A:** Credit and the ability to obtain it -- both by individual

borrowers and by financial institutions of all sizes -- is the oil in
America's economic engine, not to mention the global market. Without
credit, Americans cannot buy a house or a car. Credit cards, of course,
rely on it. Banks ensure they have money to cover withdrawals by lending
to each other. Businesses of all sizes rely on credit to cover payrolls,
and invest in new products, new locations and new equipment, which all
translate into business growth and new jobs.

The oil has run out of that engine, and the engine has seized up. As
anyone who's had an engine seize up on them knows, when that happens,
drastic, expensive and painful measures are required.

**Q: Where did this credit crisis originate?**

**A:** This goes back to the challenges we're facing in our housing
market. Easy credit led to a housing bubble where mortgages were issued
to borrowers who could not afford the homes they were buying or were not
credit worthy in the first place. Foreclosures increased dramatically.
Many loans were granted with no down payment. Without equity invested in
the property, it was all too easy to simply walk away from the mortgage,
leaving the lender with bad debt. For others, adjustable rate mortgages
adjusted too fast.

As monthly payments rose, borrowers could not make

payments on the home they could not afford in the first

place. As the housing bubble grew, mortgages were bundled and sold as
mortgage-backed securities. In general, banking institutions the world
over used complex financial instruments called default credit swaps to
hedge against losses on those securities. These swaps occurred literally
countless times on all sorts of mortgage-backed securities across the
global financial markets, and in many cases the securities holders were
both purchasers and sellers of default

credit swaps.

Thus, when the housing bubble burst, flooding the market with bad debt
and bad mortgage securities, those who sold credit swaps could not pay
off the buyers -- hurting both the insurer and the insured. This started
a domino effect that started piling up bad debt on the books of
financial institutions big and small and creating an enormous liquidity
crisis. Freddie Mac, Fannie Mae and A.I.G. among others became
casualties of this situation.

**Q: What is "mark-to-market" accounting?**

**A:** Accounting rules called "mark-to-market" are adding to

the strain on our economy. These rules mandate that the

mortgage-backed securities still on financial institutions'

books be valued in present time, as the current market

would value them, without considering the equity the good

mortgages still carry and the likelihood that most borrowers would
continue to pay them off on-time. This makes it nearly impossible to
accurately place a value on these assets. As a result, the balance
sheets of America's financial institutions have a glut of "illiquid
assets" that has paralyzed their ability to work themselves out of this
crisis.

**Q: What was the flash point that led to the need for**

**Congress to act swiftly?**

**A:** With insurmountable bad debt and a deep liquidity crisis, foreign
financial institutions began pulling money out

of American markets, jeopardizing what have always been

considered safe investments in money-market accounts

(the government was forced to step in to back up those

investments to stanch the exodus of foreign capital). In

addition, banks refused to make overnight loans to each

other -- a critical method to maintain market liquidity, right

down to the cash in the ATM.

In sum, there is zero confidence in our credit markets. This is where
our economy stands right now. The only solution is to restore confidence
to the markets and fast. The bad debt clogging up the balance sheets of
America's economy must be removed so that its credit can be restored and
liquidity injected

**Q: What does this mean for everyday Americans?**

**A:** This is from the President's address to the nation on Sept. 24:

"The government\'s top economic experts warn that without immediate
action by Congress, America could slip into a financial panic, and a
distressing scenario would unfold:

"More banks could fail, including some in your community. The stock
market would drop even more, which would reduce the value of your
retirement account. The value of your home could plummet. Foreclosures
would rise dramatically. And if you own a business or a farm, you would
find it harder and more expensive to get credit. More businesses would
close their doors, and millions of Americans could lose their jobs. Even
if you have good credit history, it would be more difficult for you to
get the loans you need to buy a car or send your children to college.
And ultimately, our country could experience a long and painful
recession."