Must-Read: Mark Roe: Surviving the Next Housing-Market Hurricane: “illiquid real estate cannot solidly underpin a stable market for overnight obligations forever…

…Like a hurricane, this disaster smashed into the financial system, which could not absorb the losses smoothly. So regulators are constructing stronger buildings that can withstand a financial hurricane…. But what if overnight mortgage-pool buyers decide, in the face of a crisis, that it is not worth waiting around to find out whether the highly complex mechanisms meant to ensure that they are paid will work as planned?… The safety level for a single failed bank is probably high nowadays. But there seem to be too many weaknesses in the overall system to guarantee against a rout if several banks failed simultaneously–or, worse, if the entire housing market, built on an unstable market of overnight lending, suffered another of its once-in-a-generation crises. By making housing-based short-term debt more attractive than other savings channels, we are courting trouble…. It is impossible, even for regulators, to know for sure whether the system can withstand a market-wide failure. Given that the world suffers from major housing bubbles every decade or so, it might not be many years before we find out.