Like many in your industry, you've completely missed the point. The market (or information flow) is working fine, but the bad information is being input by the Fed. Short term rates are and were too low both here and Japan as evidenced by the carry trade and lowering of spreads. There is no reason that the market should price fake "AAA" securities in a traunche backed by crappy mortgages other than excessive liquidity and carry trade.
The answer is to let the market set the rates. Right now 2 year treasuries are being forced down by the anticipation of lower short term rates, plus the flight to quality. That drives down all sorts of other long rates (carry trade) below a realistic inflation rate plus risk premium.
OK, if you want to make the anti-fed argument, that’s fine with me... I don’t think it’s a point I misse but a point I’m ignoring. We both know that a change like that isn’t going to happen today if ever. And even if it were implemented tomorrow, it still won’t stop the boom bust cycle.
I strongly suspect that you’re trying to use this sword to slay the same dragon you always fight, but that strikes me as futile. you’re mistaking “identification of the problem” with trying to provide an ongoing solution.
My solution on the other hand will do a great deal to address the boom-bust cycle that comes from asset bubbles, and will do so with a policy change that is small and achievable.