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The housing crisis, like all crises, imparts lessons. The most important one is also the oldest: risk never takes a holiday, even though it may appear excessively sleepy for long stretches.

It's a simple yet powerful message, although that doesn't stop any one from ignoring it, as many do. But the warning signs are almost always evident, as they were all along in the housing boom that's now turned into some degree of bust.

Indeed, any time you hear that a financial strategy or investment product is predicated on the notion that the underlying market is largely immune to the bears, one should assume the appropriate response by running for the hills.

Alas, such caution was arguably in short supply as Wall Street securitized $2 trillion worth of home mortgages over the past 10 years, built partly on the idea that the average home sweet home would never suffer a material decline in price. But as the Wall Street Journal reported on Monday,

much of the promise of the new financial architecture - together with its underlying assumptions - has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.

Turning assets into securities is nothing new, of course. From credit card debt to commodities, the boom in securitization has been percolating in the financial industry for 20 years. Arguably the difference this time around is that the underlying asset was thought to be impervious to the bears.

It's understandable how someone might think so. Looking at year-over-year prices for housing on a national basis, for instance, shows no losses for decades. Indeed, you have to go back to the 1960s to find red ink by this standard, and even then the dip was slight and brief. If we stop there, housing as an asset class exhibits the stuff of legend: enduring and virtually uninterrupted gain.

There's just one problem with that conviction: it's wrong. True, housing prices rarely go down, or at least much of the second half of the 20th century tells us. But rarely isn't never. In fact, there were periods of steep price declines, albeit one has to look back to the 1930s and 1940s for the evidence, which readers can do by glancing at a long-term chart of housing prices courtesy of Professor Robert Shiller via Grant's Interest Rate Observer.

Alas, such warnings come too late for those suffering from the assumption that housing is a bullet-proof asset. Again quoting the Journal story noted above, "House prices are down by 0.5% to 10% now, depending on the measure used. If they fell 30% - what it would take to restore their historic relationship to inflation, rents and incomes - $6 trillion worth of housing wealth would be wiped out."

Now that we're knee-deep in a housing correction, and the crowd is conscious to the fact that no one decreed a holiday for bear markets in real estate, the only question is what to do about it? Minds differ, as always, although it should comfort no one that the debate ranges far and wide on the necessary tonic for the economy. As a sample, in one corner is New York Times columnist Paul Krugman, who on Monday charged that the Bush administration's mortgage relief plan falls far short of what's needed to stem the tide of rising foreclosures and financial havoc.

Meanwhile, in a December 6 commentary, Peter Schiff of Euro Pacific Capital warned that an ill-conceived cure may be worst than the disease:

Without question, the Bush administration’s mortgage rescue plan will exacerbate, not alleviate, the problems in the housing market. As the plan will sharply reduce the ability of new buyers to make purchases, it really amounts to a stay of execution and not a pardon.

Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan.

Your editor doesn't pretend to know what prescription, if any, will cure the housing hangover, or prevent the related pain from turning into a calamity. It's taken 10 years or so to get into this mess, and it'll take more than another paragraph of opining and some hastily written bit of legislation to get us out. But this much is clear: believing that the future's clear and that risk estimates are forever accurate is dangerous - especially when your own hard-earned money's at stake.

Few things on the planet are as transparent or as pertinent as that tidy observation when it comes to finance, which is why they invented diversification. The curious thing is that such lessons will continue to be lost on a fair share of institutions and individuals. All of which suggests that the biggest risk continues to emanate from within because homo economicus continues to stalk the financial landscape.