The interaction between lenders' and investors' views and house prices illustrates the pernicious feedback loop I highlighted earlier. These problems became apparent only in retrospect, in part, because the growth of the originate-to-distribute model for mortgages was an ongoing innovation in financial markets; as a result, neither the market nor regulators had sufficient information for evaluating the nature of the risks involved.
Looking forward, efforts to improve scrutiny of the processes that originators use and the incentives they face, better information for consumers, improved performance of the credit rating agencies, and a number of other reforms that have been recommended by the President's Working Group on Financial Markets will be important in  23  Posen (2003) provides an extended discussion of the reasons why such a reading of the Japanese experience is mistaken.