the essential question is whether markets can fail, and whether failures like martingale effects arise solely from within unstable markets themselves, or instead are caused by government intervention

free market idealogues will always blame the government as the root cause of the current crisis and vice versa for idealogues on the other side, who will always blame the market itself - both are wrong

regulation can work in either direction, to enable efficient markets, replace them under market failure, or undermine them where they could work, and the "absence" of regulation is no different than different kinds or degrees of regulation - all markets are regulated in one way or another

the martingale effect constitutes a shift of risk via leveraging towards home owners and away from economic players who earn fees and commissions as well as investors who would otherwise share risks with homeowners

a win-win outcome was reasonably expected by everyone involved in individual housing transactions due to rising prices, and as long as prices were rising, free market idealogues were cheering it on as something for which the government should not interfere

at the original asset level, homeowners absorbed the high risk/low incidence of falling house prices, heavily pushed by a middle level of parasitic brokers, lenders, rating agencies, forecasters, advisors, financial consolidators and resellers who raked in risk-free commissions and fees off the top of the added value stream, passing securitized mortages upstream into triple-A rated investment plans everywhere at the top of the investment food chain

the recent rash of bailouts was targeted towards those upstream players caught flatfooted in the downturn - the most incompetent who mispredicted the downturn - the free-market idealogues who undermined competition and transparency every step of the way as they fought off regulations which would enable - not block - competition and transparency - for example, one recent study showed 60% of the sub-prime loans were unnecessary, manufactured to pump up the fees and rates, for which the buyers were qualified instead for prime loans

hundreds of millions in lobbying fees assured that no regulations designed to enable competition and transparency would see the light of day - for example, Freddie Mac and Fannie Mae were so powerful, they were able to lock up the lobbying industry by hiring all the potential competitors among the lobbyists themselves (no, it wasn't because they were related to the government - pure private firms do the same thing)

homeowners were left footing the bill of $4-5 trillion dollars of evaporated wealth, which is the root cause of the current recession - because unlike the others, homeowners have no concentrated constituency in the market or political arena when house prices fall - some are now outcasts in the leper colony, except of course as part of the sinking boat to justify a bailout package which heavily favors those who sunk the boat in the first place - the free market idealogues who smugly mocked and jeered those who indeed identified and warned of the housing bubble years ago

the next time a free-market idealogue crows "socialism" to nickle and dime common sense regulation to death, peel back the onion a little to see who's really getting the free ride ... it's a double or nothing bet he or she is

Good point one of the key duties of the government even in a free market system is to see that individuals and companies that cause material damage pay for that damage. That is regulation but it contributes to an efficient market.

"On September 11, 2003, the Bush Administration recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. Under the plan, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae. The new agency would have the authority, which now rests with Congress, to set capital-reserve requirements for the company and to determine whether the company is adequately managing the risks of its ballooning portfolios. The New York Times reported that the plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac is broken. The Times also reported Democratic opposition to Bush's plan: "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Who was it really that blocked regulation?
The long history of this problem has to do with over capitalizing people to purchase homes which inflated their value. So what we needed was more "conservative" lending standards. When their is less money floating around for purchasing their are lower housing prices. When banks and government (Fannie May and Freddie Mac) conspire to increase credit (money not backed by real asset value) it leads to inflation in housing prices. Which leads to the theft of millions of peoples money (or homes) by banks which overinflated the value. How do we solve this problem? Return to a time when loans required good credit or a sizable down payment which will reduce home sales and keep prices lower because builders need to move their product. We could also bail out existing homeowners to the tune of 20% of their mortgage value which should reduce their payments in a downturn, instead of continuing to do bailouts of institutions that were crashing because of they helped create the problem. If the non-free market "ideologues" did something like that, I would be more inclined to trust them. But as Obama has shown, he doesn't really want to help, he just wants to bloat government and keep the people as slaves of our banking industry and the government.