At the end of the movie The Wizard Of Oz, the Tin Man asked, What diid you learn, Dorothy?
That’s a good question to ask about any situation- what were the lessons learned?
We are still sorting out the answer to that when discussing the housing crisis, but Alice Rivlin, senior fellow at Brookings and former vice chair of the Federal Reserve has some pretty decent answers:
The American dream of home ownership for average families is lying in a heap of toxic assets, but it can emerge stronger than ever if we learn the right lessons from the sad history of this decade. Lesson one: housing prices can go down as well as up should be written in huge letters in every lending institution in America. Lesson two: lax lending standards, teaser rates, no-doc loans and other immoral practices are no favor to the borrower and cannot be tolerated. Lesson three: loan originators must keep part of the risk. Their function is to judge the credit worthiness of borrowers. Allowing them to off-load the entire risk of default on someone else invites disaster. We need securitization, but must rewrite the rules.
Now the question is, were the lessons learned? Will the rules be rewritten?
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Lesson 3 seems to me to be the big one. Way too tempting with no risk to skip a few details. It’ll be interesting to see if our fabulous politicians get out of bed with the bad guys long enough to do the jobs they were elected to do and not let this happen again. There I go dreaming again.