What can we all learn from mortgage bust?

Sorry to start off on a down note, but here are a couple of percentages for you: 91 and 94.

Those are the percentage declines in the share prices of mortgage giants Fannie Mae and Freddie Mac over the past year. In technical terms, we call this a train wreck.

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Jared Bernstein is director of the Living Standards program at the Economic Policy Institute in Washington.

When society confronts a real train wreck, the first thing we do is try to help the victims and restore the transportation systems. Then we want to figure out what went wrong and fix it.

In this case, most of our focus has been on the first two steps, which makes sense in the short term. Fan and Fred hold or back about half of U.S. mortgage debt, and they’ve dealt a good portion of that debt to other countries. Their importance to the U.S. housing market and to global financial markets makes them poster children for the TBTF club —Too Big to Fail.

So I don’t blame President Bush and Congress for creating a credit line, even one that leads right to us taxpayers. But I sure don’t want to sit around crossing my fingers, hoping that credit line doesn’t get tapped. Whether it’s Fan, Fred, Bear (Stearns), or some other TBTF bank out there, we’d better seriously contemplate Step 3: What are the systemic fixes needed to get capital markets back on track so that they stay on track?

In that spirit, here are some guidelines:

• Lest we forget amidst the wreckage, the housing bubble was the main factor behind Fan and Fred’s near-death experience. Less than a decade ago, a bubble in IT and financial markets brought an end to the 1990s economic recovery. In other words, bubbles are much worse than we like to think, and we should work much harder to identify and prevent them.

By “we” I mean, among others, the Federal Reserve, which under Greenspan had a fairly explicitly stated policy of waiting by the sidelines as the bubbles inflated, mops at the ready.

• I don’t really care if big banks play with fire, until I’m called upon to put their fire out. On the other hand, if you’re TBTF, then we must provide you with the necessary oversight to avoid charging a costly bailout to US taxpayers.

Bottom line, it’s the underpricing of risk that got us into this mess. Complex financial innovations, greedy lenders, reckless borrowers, feckless underwriters and rating agencies — they all worked together to thwart the price system. The result was that too many people took on too much debt with far too little skin in the game.

The game’s over now. Let’s thoughtfully rewrite the rulebook so we’re not back here again tomorrow.