Can Wall Street Find a Safer Way to Package Assets?

This is hardly the first time problems have surfaced with securitizations. Over the past 30 years, there have been any number of small explosions — often eerily similar in cause. In the mid-1990s, for example, as so-called nonbank banks started issuing credit cards, the new competition drove many players to court borrowers with less-than-pristine credit histories. Teaser rates and no-fee cards drew in people who were more likely to default, and they did. The value of securitizations built on top of those loans faltered. It has also happened in manufactured homes, aircraft leases, franchises and, even before the most recent debacle, subprime mortgages. "When I look at this crisis, I'm only looking at a difference of scale," says Joseph Mason, a professor of banking at Louisiana State University.

Credit moves in cycles. Lending becomes plentiful and then it retracts; the process reboots. Securitization amplifies the effect, an advantage in good times, since loans are economic fuel. But then the bad times come, and so does disaster.

That doesn't mean securitization is better banished. Our banking system, like any other part of human society, has evolved, and securitization is a core part of how we move capital around the economy. But it might mean it's a good idea, in preparation for the next upswing, that we resolve that spending more than 2 ½ times our salary on a mortgage isn't the best idea.

In other words, when you go back to the bank for that second loan and you don't get it, maybe that's because you shouldn't.