Robert Rasche's crystal ball on economic recovery tells him the road will be long and rough -- even on those who have done everything right.

The senior vice president and research director of the St. Louis Federal Reserve said economic recovery will come with a change in the culture.

"It is not a matter of how Wall Street does business, it is how all of us do business," Mr. Rasche told south Augusta and Martinez-Evans Rotary club members Tuesday.

The blame for economic conditions is widespread, he said, and goes beyond Wall Street and the big investment banks.

"But also the person on the street has gotten into a situation where they are heavily leveraged," Mr. Rasche said. "That's a term out of the finance books. In the street jargon, you call it mortgaged over your ears. We are an economy that has run on debt."

The Federal Reserve representative, who made it clear that these were his opinions and not those of the Fed, said the road to recovery will involve a reduction of debt in financial institutions and households.

Economic problems did not stem from credit card problems, but an increase in mortgage debt, Mr. Rasche said. Two years ago, people were able to get mortgages with "little skin in the game" or take out loans on the equity they built.

Housing prices come down, and suddenly these people have got "no skin in the game," he said.

Mr. Rasche said the era of investment banks and government-sponsored enterprises such as Fannie Mae and Freddie Mac is over.

"Mortgage securities won't go away, but we're going to need to figure a new way to do it, one with more transparency," he said.

More transparency will be needed to unfreeze the credit markets. Normal day-to-day transactions are not working, he said.

"People don't want to make deals because they don't trust whether there is good assets buried behind all this stuff that they can't see," Mr. Rasche said of the mortgages that were packaged as investment securities.

Despite the dour message, he did have a positive prediction.

"I don't think the economy is going to sink. There is a lot of strength in the economy. We've got some muddling through to do, but this is not the death knell of the U.S. economy," Mr. Rasche said.