Even the responsible got sucked in by the housing bubble mania

One more for the housing-bubble dead pool? The LA Times this morning reported the turmoil at Downey Savings & Loan. The company's parent sacked its leadership and is looking for a buyer, following a $218.9 million loss in the second quarter, its fourth straight quarterly loss.

Here's the key graf in the story, IMO:

"Long known as a conservative lender, Downey veered off its course in recent years by making many "option ARM" loans, which are risky adjustable-rate mortgages that allow borrowers to initially pay less than the interest that accrued each month. With home prices sinking, such loans are seeing high default rates."

This is the tragedy of what happened in the housing market over the last decade. Many lenders, and millions of borrowers, had no intention of giving or getting option-ARM or teaser-rate loans. They wanted to do things the old-fasioned way, giving and getting loans no larger than borrowers had the documented income to repay.

But the market would not let them. Wall Street stood ready to punish the management at any lender that did not "maximize its income" by engaging in shaky lending. So managers at companies like Downey had no choice but to go along. The only alternative was to be sacked and replaced by managers who would do what Wall Street demanded.

With billions of shaky loans flooding the market and inflating the price of homes, conservative borrowers had little choice but to play along, too. That $200,000 home that you could have afforded now cost $400,000, forcing you to take out a larger option ARM loan to get the house. If you did not, real estate agents said you would be "priced out forever," unable to buy any home.

We can stop this sort of thing from happening, of course. All we need to do is to say, collectively, that we're not going to go down that road anymore.

How? Through government regulation. We used to have it, too, following the Great Depression. But by the 1990s, we'd collectively forgotten the lessons of the Depression, and Congress repealed many of banking rules that had prevented such risky lending for more than half a century.

Sure enough, within a decade we had another bubble. And another banking meltdown.

Cue George Santayana: "Those who cannot remember the past are condemned to repeat it."

Robert Niles also can be found at http://www.themeparkinsider.com