One of the things that is always curious, and maddening, is the way in which analysts or regulators who are supposed to be watching out for the public, are asleep at the wheel. Not to mention the pontificators in the media who are just flat out wrong. To wit: I’ve always wondered–where the heck were the regulators when the stock market bubble rose and, then, burst? The answer: cheering on, with the media, the speculators until the crash came.

And the same is true with the housing bubble, as Paul Krugman points out in his column today:

 

Seriously, it’s starting to look as if C.D.O.’s were to this decade’s housing bubble what Enron-style accounting was to the stock bubble of the 1990s. Both made investors think they were getting a much better deal than they really were. And the new scandal raises two obvious questions: Why were the bond-rating agencies taken in (again), and where were the regulators?

 

To understand the fuss over C.D.O.’s, you first have to realize that in the later stages of the great 2000-2005 housing boom, banks were making a lot of dubious loans. In particular, there was an explosion of subprime lending — home loans offered to people who wouldn’t normally have been considered qualified borrowers.

For a while, the risks of subprime loans were masked by the housing bubble itself: as long as prices kept going up, troubled borrowers could raise more cash by borrowing against their rising home equity. But once the bubble burst — and the housing bust is turning out to be every bit as nasty as the pessimists predicted — many of these loans were bound to go bad.

 

This was no surprise. Among other, Dean Baker at the Center for Economic and Policy Research, has been writing about the housing bubble for a very long time.

And Krugman asks:

 

Now, you might have thought that S.& P. and Moody’s, which gave Thailand an investment-grade rating until five months after the start of the Asian financial crisis, and gave Enron an investment-grade rating until days before it went bankrupt, would by now have learned to be a bit suspicious. And you would think that the regulators, in particular the Federal Reserve, would have learned from the stock bubble and the wave of corporate malfeasance that went with it to keep a watchful eye on overheated markets.

 

But apparently not. And the housing bubble, like the stock bubble before it, is claiming a growing number of innocent victims.

 

The victims will be a lot of people who are going to be hammered hard.