We have to restore a traditional mortgage lending market or we are going to have more boom and bust cycles that are driven by derivatives trading of mortgage paper in the financial markets. The financial markets are turning the real economy into a casino instead of supporting it. At this point nothing has been done to remove the “innovations” that generated the bubble. The only thing preventing its return is that the damage done is too fresh in everyone’s mind. We need something like the Glass Steagall act that was scrapped in 1997. It’s not a coincidence that the bubble followed the repeal of GS.
I agree, we need some kind of limited regulation that allows the market to continue but places a requirement on risk takers to be responsible. They put Martha Stewart in jail for insider trading. They might consider some kind of retribution for making sub prime loans that are written upside down from the start. Perhaps fines could be based on lifetime results. Individual equity in your own home is carried over a lifetime for tax purposes. Perhaps the risk to home ownership should be placed on the buyer. Walking away from a mortgage, just because it’s upside down, could be a crime. If the foundation is strong then the market won’t crumble. If the lender takes a huge risk then that lender should become part of the solution to right the wrong. If you must speculate you should be responsible for everything that happens.