"Like locking the barn door after the horse is gone." (Old saying)
Capitalism is like that proverbial horse in the barn; it's a valuable, productive animal when harnessed properly but it does have a tendency to get loose and run off, especially if it's a stallion. The owner can't afford to be careless in controlling it. But the fact is that often as a society we are careless, so we're frequently having to get control of the horse again, and then promising ourselves we won't forget to close the barn door.
Most economic analysts now appear to agree that it was the bursting of the "real estate bubble" that set off a lot of the other economic problems we're now dealing with. And naturally, lawmakers are at work, hoping to close the door after the fact, with the Mortgage Reform and Anti-Predatory Lending Act of 2009, coming soon to a Congress near you (well, near me, anyway, since I live near Washington D.C.). This proposal aims to reduce practices that rewarded lenders for pushing riskier loans, and to set "minimum quality standards" for mortgages. Enactment into law seems likely, with even the real estate and mortgage lending sectors supporting it.
Now, there's nothing inherently wrong with this attempt; it seems reasonable, and likely to accomplish its goal, so it's a positive step. Better to close the barn door after an escape, than not to close it at all. Yet I think it ignores a large part of the problem. There are always at least two parties to a real estate transaction. In this case, let's call them lenders and borrowers. And, let's note a third party that I'll call the matchmakers: investment gurus, the housing industry, and a Congress with an irrational soft spot for home ownership, who urged the borrowers and lenders to play "let's make a deal."
Personally, I think all three parties were equally responsible for the bubble. As prices rose and real estate began to look like a can't-lose proposition, borrowers (urged on by matchmakers) clamored for title to a house and were only too eager to accept terms that anyone with a lick of common sense would have rejected. Variable rates that could easily go from 5% to 14% in a matter of months? Sure. No money down? Why not? Loans for amounts greater than the home value? Bring it on! Refinance and cash out your equity? Absolutely! Greedy borrowers were beating down lenders' doors to get a piece of the pie and of course lenders were only too glad to oblige.
The proposed law seeks to shut a door and keep the lender stallion in the barn. But it does little to keep the borrower mare out of heat, or the matchmakers from parading the mare in front of the barn door. Stallions can break down doors!
A true fix for mitigating future runaway real estate markets would deal with all three parties. In addition to the measures already being proposed, we should be looking at a national minimum down payment of perhaps 10%, and reducing the tilt of our financial system toward home ownership by scaling back the tax deduction for mortgage interest. The latter is a step we need anyway to free up discretionary funds for more basic needs like food, health, and education.
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