FRANKNOTE

...Rosen predicts that when all is said and done, there could be as much as $1 trillion worth of losses in the financial system. He predicts that investors will bear 60 percent of the losses and the government could shoulder the rest.

What's in store

To pay for these losses, the government will have to raise taxes, sell more debt or both.

Near term, Rosen predicts that the Fed will have to keep cutting interest rates to prevent further weakness in housing and the economy. That will put further downward pressure on the dollar. A falling dollar will fuel inflation because imports, oil and other commodities will cost more.

Long term, the government will have to raise interest rates to entice foreigners to buy our debt. "The effect of all this is a recession and a lower living standard than we would have had without having had this mess," Rosen says. "This generation and the next generation will pay for this."

Leamer says he also worries about "the regulatory changes that will make it harder for Americans to get homes. The market was inappropriately lax. We're likely to flip in the other direction. There will be all sorts of restrictions" on who can buy a home.

But the biggest side effect, Leamer says "is the moral hazard" the government could be creating. When the government bails out stupid or risky behavior, it encourages the same kind of behavior.