A year ago, however, with the subprime mortgage meltdown of August 2007, I became certain.

The impetus for a big subprime market came from within the private sector innovation by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks.

After all, when the global financial crisis erupted in 2008 from the bowels of the American subprime mortgage market, global investors responded by fleeing to the US, not from it.

What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi trillion dollar credit default swap market.

And essentially the same happened with US subprime mortgage lending and with the Spanish banking system in the 2000 s.

After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.

Indeed, subprime mortgage lending delivered illusory wealth increases to Americans at a time when they were suffering from stagnant or falling real wages.

But, in America s home mortgage market, this is much less common.

But that is precisely why a government managed mortgage market is dangerous.

Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.

Europe s Subprime Quagmire

That time is over, as the breakdown of the American mortgage securitization market has shown.

It may make sense for central banks (or Fannie Mae, America s major government sponsored mortgage company) to buy mortgage backed securities in order to help provide market liquidity.

Sub Saharan Africa s Subprime Borrowers

In Mexico, the market for new low and middle income housing has grown rapidly, thanks to the creation of a market for residential mortgage securities in 2003.

One sure way to reduce the savings rate in China would be to develop an American style mortgage market there.

The policy and regulatory mistakes that contributed to the subprime mortgage crisis and thus to the US financial system s near meltdown and the eurozone s travails have brought the issue of optimal economic regulation and its relation to democracy to the fore once again.

After the sub prime mortgage crisis, politicians alleged that the market was short sighted and irrational, and rushed to propose new regulations.

Moreover, the US housing market appears to be stabilizing....Overall, the US mortgage market has remained resilient, although the sub prime segment has deteriorated a bit more rapidly than had been expected.

Some, observing the crash of the sub prime mortgage market, say, Don t worry, it is only a problem in the real estate sector.

An interest rate rise might take the heat out of the mortgage market, but it will also chill the rest of the economy.

This brings us back to the US Treasury s plan to spend hundreds of billions of dollars to unclog the sub prime mortgage market.

The staff saw the relaxation of lending standards in the US mortgage market, but noted that borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher income households that were aware of the attendant risks.

It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned.

An audit would also reveal more details about financial market interventions like those in 2008, when the Fed purchased mortgage securities from Bear Stearns and AIG.

However, beyond the mortgage market, other huge risks are lurking, especially in the US financial system credit cards, car loans, and presumably a few other things.

Occupy the Mortgage Lenders

So its failure to press the United States to redress the mortgage market vulnerabilities that precipitated the current financial crisis indicates that much remains to be done.

Indeed, with its recent decision to pursue QE3, the Fed is focusing once again on the mortgage backed securities market but, given that the market is much healthier now, it is unclear how much good this will do.

HONG KONG When the US investment bank Lehman Brothers collapsed five years ago, emerging market economies did not hold many of the toxic financial assets mainly American subprime mortgages that fueled the subsequent global financial crisis.

This, of course, is just the story of subprime mortgages in another guise.

And the market is prone to temporary fits of shared enthusiasm for emerging market debt, for Internet stocks, for residential mortgage backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize.

MUNICH Once upon a time, stocks were risky and collateralized securities were safe. That time is over, as the breakdown of the American mortgage securitization market has shown.

Policy enhancements have been made to mortgage portability, second homes and mortgage qualification for self employed borrowers.

The reliance of modern banking regulation on risk weighting is nowhere more important than in the mortgage market. If regulators get it wrong, the entire edifice could collapse yet again.

But lower short term interest rates have led to higher medium term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures.

Ultimately, these financial failures reflect the downward spiral of house prices and the increasing number of homes with negative equity, i.e., with substantial mortgage debt in excess of market values.

The Right Weights for Mortgage Risks

There is also a dark cloud over the mortgage market following a judgment by the Supreme People s Court in 2003 that banned the repossession of homes that are a primary residence.

The plan s central conceit is that government ingenuity can disentangle the trillion dollar sub prime mortgage loan market, even though Wall Street s own rocket scientists have utterly failed to do so.

But the main concern centers around the Treasury s apparent intention to pay more than double the current market price (20 30 cents on the dollar) on the premise that its success in untangling the mortgage market would make any discount seem like a bargain.

But the main concern centers around the Treasury s apparent intention to pay more than double the current market price (20 30 cents on the dollar) on the premise that Treasury s success in untangling the mortgage market will make any discount seem like a bargain.

The first lesson is that, despite the limited overall volume of subprime loans, the subprime crisis could blow up into the biggest financial crisis in living memory, because an overstretched financial system was unable to cope with even limited losses.

Mortgage debts, too, must be written down.

When that happens, inflationary expectations will mount, long term government bond yields will rise, mortgage rates and private market rates will increase, and one would end up with stagflation (inflation and recession).