Everything I've read about the housing bubble tells me it wasn't having the bubble itself that was the problem, but the fact that it was overinflated by bad bond ratings and a sneaky investment scheme that encourage poor loans. Is that wrong? Was that not regulated out? Is it not possible to have a healthy booming housing market?
You really can't separate out the bubble from the problems with structured finance and Wall Street. The reason that mortgage backed securities were attractive was that the housing prices were going up. People could buy a house they couldn't afford, wait for appreciation and then refinance. For a period of time, credit-worthiness didn't really matter in the short-term. But, that only works if the market is going up.
Dodd-Frank did a lot to improve the market in terms of regulating rating agencies and asset backed securities as well as bulking up regulations on the consumer side. But, you have to trust that the SEC and CFTC are going to be able to regulate exotic structured finance. It seems like finance is always one step ahead, so I wouldn't be too confident that we've solved the issues that created the meltdown. In the short-medium term, it's probably true that Wall street will learn from AIG, Bear and Lehman and not be as foolish as they were with CDSs, CDOs and RMBSs in general.
