Taking on shaky debt is just the first step toward restoring stability to financial markets.

At the end of a week in which the U.S. and, indeed, the global financial system seemed on the brink of collapse, we can be thankful for two things:

First, Hank Paulson, former Goldman-Sachs CEO, and a man who understands global financial markets, is leading the Treasury Department.

And second, the Dow ended the week at about the same level it started, in spite of losing almost 900 points in between.

As Wellington said after just-besting Napoleon at the Battle of Waterloo: "It was a close run thing."

Indeed, there were times during the past week when the world's financial system threatened to shut down. But for the heroic efforts of central banks to pump billions of dollars of liquidity into the markets, this apocalyptic result might have happened. The last time it did was 1929 and we know what came after that – a Depression is not a place we would enjoy revisiting.

HOW IT BEGAN

How could we be pushed to this brink – because of home mortgages, of all things?

It started several years ago when a group of Ph.D.-like financial architects at the big investment banks like Goldman Sachs and Morgan Stanley developed a new security by putting together enormous packages of mortgages, slicing them into arcane packets and selling them to all kinds of investors (including big banks themselves) as high-yield, low-risk debt securities.

These securities quickly became "hot," and everyone wanted some. Investors were told their risk was minimal because of the clever way questionable loans were bundled with not-so questionable loans. It turns out that the only people who may have understood the real risk of these securities were the apocryphal Ph.D.s, toiling in the heart of Wall Street. They had devised a security so complex and clever that it was impossible to tell how good or bad it might be.

As long as most people thought these securities were "good," that is relatively risk-free, they were good. However, as soon as it became clear from the demise of Fannie Mae and Freddie Mac that these securities might not be so good, nobody wanted anything to do with them.

Since most of the big banks and firms like Lehman Brothers had been drinking (and prospering) from this Kool-Aid for years, all of a sudden there was no one willing to buy what everyone was trying to unload.

This is what triggered a string of events that put the global financial system in free-fall for three days last week.

The irony here is that all of these mortgage-backed securities have value – some of them probably have quite a bit of value. However, they are so complex that now not even the Ph.D.s have a clue. In this there may be a silver-lining of sorts.

THE WAY FROM HERE

The short-term key to navigating through this crisis is the Treasury Department plan to set up an agency to buy these distressed securities – much as was done at the time of the savings and loan crisis of the late 1980s. While this will be costly, several hundred billion dollars, these securities will have considerable long-term value once the market stabilizes. With a little luck and bipartisan courage in Washington to establish the new agency, we should weather this crisis.

However, the real message here is that it is past time to address the fundamental problems that underlie this crisis. We, as a nation, have been living well beyond our means, increasingly dependent on foreign investment to finance an enormous deficit.

The weakness of the U.S. dollar is a direct result of short-sighted economic policies that have simply viewed the tax cuts that ballooned the deficit as the panacea. Tax cuts are the opiate of the masses – castor oil is what is needed.

When the economy has been on morphine for so long, castor oil will not seem palatable.

TAKING STEPS

We need a president who understands this and is willing to take steps to address underlying problems such as the escalating costs of Medicare and Medicaid, our dependence on oil, and the need for infrastructure investment.

So far Sen. John McCain is talking about firing the chairman of the SEC (the last thing needed). Sen. Barack Obama has at least been more thoughtful.

We Americans need to demand some castor oil. Sound draconian?

I confess I was weaned on castor oil, and I have been thankful to my mother ever since.