The National Bureau of Economic Research will soon determine that the American economy slipped into a recession in December 2007. This happened amidst a year of the most severe credit problems faced by the banking system since the 1990s. The severity and duration of this recession will be determined by the actions of policymakers at this critical juncture in financial history. There has been much discussion in the press of reactive stimulative measures through traditional monetary and fiscal policies.

Historically, panic-driven policies can be attributed to mistakes in monetary and fiscal policies. Why would policymakers use the same old tools for today’s very different banking and economic crisis?

Government stimulus and lower interest rates are a risk for the American dollar.

What is needed is a government effort like the Resolution Trust Company, which was very successful during the last credit crunch in the 1990s when the savings and loan crisis crippled the nation’s credit system.

A government-sponsored agency would set a “floor” on the asset valuations of the securities held on the balance sheets of our banking system for a broad array of players.

The 1989 RTC provided a similar type of mechanism for allowing liquidity to return to the funding markets.

Large financial institutions hold positions of various qualities of assets in legally complex structured investment vehicles, or SIV. These structures are required by their covenance to liquidate assets in forced sales at “fire sale” prices due to the severely depressed conditions in the markets.

Many large financial institutions have brought the “off-balance” sheet SIV structures back on their balance sheet with commensurate write-offs to capital. Many other institutions must still come clean. Fragmented regulators failed to learn from the Enron episode the potentially devastating impact of off-balance sheet accounting. Foreign capital infusions from sovereign wealth funds are de rigueur for the moment, but have unknown long term risks to our country.

Lower rates from the Fed could help consumer’s access credit, but may not necessarily lead to lower mortgage rates or make mortgage refinancing easier to obtain.

In recent years American consumers have grown wealthy watching the value of their primary asset — their homes — appreciate. Watching one’s home sink in value is disruptive to the psyche and the profligacy of one’s pocketbook for future consumer spending.

The ABX index has become the market’s pricing mechanism valuing various sub-prime residential mortgage-backed securities, or RMBS. Its drop in value over the last year, has affected the valuation of all mortgage backed private label securities. The forced sales by market participants has pushed these securities down to a level which suggests a delinquency rate in housing for subprime securities of 40%, while the overall mortgage market has default rates that are much lower.

This is clearly the case of throwing out the baby with the bath water.

The new RTC would be a market-based asset management entity that would buy money-good triple A-rated prime and subprime RMBS securities at a price like the ABX index which has become a commercially recognized pricing source.

The new RTC would be a buy and hold entity, which would be able to securitize these securities into new ones as an exit strategy. Many of these securities are distressed because there is no financing for this asset class. The cash flows on these distressed securities will flow back through to RTC on most of the assets at a rate that is currently embedded in the distressed prices of these securities.

This “buyer” would create a stable floor under the market, and would encourage vulture buyers to come into the marketplace to buy the lower-rated assets at a market price to be determined.

Between 1989 and 1995, the RTC closed 747 thrift institutions and purchased $394 billion in mortgage-related loans. Similarly, the new RTC would help reliquify the banking system by purchasing a congressionally authorized amount of these securities.

In the recent analysis of the American housing debacle, and recession, it seems to have gone unnoticed that housing and small business are a driving force of the American economy.

Ninety percent of all job creation in America comes from small to medium-sized businesses, many of which are consumer-related. Regulators, authorities, and Treasury officials need to become creative and look at the success the RTC had in the 1990s for solving this current crisis.

Ms. Camilli, a 25-year veteran of Wall Street and a former employee of the Federal Reserve Bank of New York, is the owner and principal of Camilli Economics, LLC in New York City.