07/24/2008 05:12 am ET Updated May 25, 2011

Why We Are Where We Are

It seems so strange that this IndyMac Bank problem has caused so much concern in the marketplace. Why is it so difficult to understand the failure of a financial institution that was a very aggressive lender to homeowners at precisely the wrong time in the housing cycle?

This leads to why it is important to understand our economic mess in the most simple of terms. People used too much debt to buy things (ie. homes, commercial properties, and companies) at the wrong time in the economic cycle and lenders have been too lax in their lending standards. This has all changed because it should. In short, risk has been repriced.

Over the past 7 or 8 years, the US economy has benefited from an ability to borrow -- against your home, to buy a commercial property, or to buy a company. The ability to borrow more than is prudent at rates below what should have been charged by borrowers that were not credit worthy have now come to a screeching end. An individual, company or investment firm that benefited from borrowing too much at below market rates has or will feel the financial pain.

There is no quick fix our country can introduce, but there are many smaller adjustments we will (and have already begun) to make:

1. We are borrowing more prudently.

2. Financial institutions will lend more conservatively with better expected returns, and eventually....

3. We will grow more confident in the "surviving" financial institutions, despite the mistakes of the recent past and our economy will strengthen as a result of our increase in confidence.

My point is we have a crisis of confidence, and confidence will be restored as our financial institutions convince the market that they have returned to sound lending practices. Most already have.

There are many culprits in this mess; the naïve individual borrower, the misleading lender, the often incompetent rating agency, and the greedy investor all share blame and therefore should expect financial pain. The key is to rebuild confidence in the system by acknowledging the cause and addressing its excess. I believe this process has already begun.