Thrift and fiscal restraint, both individual and governmental, are the only long-term solutions to the current crisis. As a nation and as individuals, we will need to recognize that debt-driven prosperity is illusory. Personal and government consumption must fall. It will do so through prudent restraint on spending, or inflation that reduces the real value of all economic magnitudes.

As Secretary Paulson candidly admitted, the tough decisions on Fan & Fred's ownership structure have been left to the next administration and the next Congress. My advice to the presidential winner would be to make the hard decisions in his first six months in office. First, Paulson's plan to downsize them by selling off their portfolios beginning in 2010 must be aggressively implemented. Whatever role the institutions have played in the past in underwriting mortgage-backed securities, there never was a public policy justification for the enterprises to hold large portfolios of them. That saddled Fan & Fred and the taxpayer with interest-rate risk, which helped bring them down. Second, the ban on political lobbying must be kept in place. That renders them political eunuchs, as well they should be. The market solution is to get their assets into private hands. As their assets are downsized, we can seriously contemplate making Fan & Fred go away.

Successive administrations and congresses have fiddled while the net worth of these major mortgage lenders eroded. It would have been far better if the balance sheets of the companies had been shrunk, and they had been required to issue more shares and subordinated debt to the capital markets. Nonetheless, the Treasury's proposal has the virtue of honesty and transparency. The proposal now makes explicit what has long been implicit: the $5.3 trillion in outstanding debt of the companies belongs on the government's balance sheet because it has been effectively guaranteed for years. If the government becomes a stockholder in the companies, it will clarify that the companies are quasi-socialist enterprises.

Now the administration and congress need to settle down to the serious business of enforcing retrenchment and reform at Fannie Mae and Freddie. The two enterprises need radical downsizing so that they will no longer pose a threat to the financial system and the economy.