The Feds have launched a new commission to unearth the causes of the subprime mortgage come “toxic asset” spawned “Great Recession” of 2008-09. The commission will be exploring 22 areas of concern and possible cause. I would suggest that the commission members keep in mind several fundamental facts of the near catastrophe:

1. When one invests in a loan, the investment is the loan, not the collateral. The return on the investment comes from earnings on the loan, not the value of the collateral.

2. Collateralized, mortgage backed and securitized debt provided an unprecedented supply of credit for consumption, particularly puchases of homes.

3. Bundling mortgages and other loans into investment instruments allowed a wide spectrum of investors to invest in these assets. It also greatly dispersed risk.

4. Devaluation of the “securitzed debt” holdings was begun long before there was any increase in defaults, let alone foreclosures, on mortgages. The devaluations began as soon as the prices in the property market leveled off. Since no one had a full picture of the securitized debt market, they panicked and started to devalue the assets based on assumptions about what would happen.

5. This massive panic driven devaluation of securitized debt sparked the credit crisis that led to the economic crisis that led to the recession.

The commission should take most of this year to find the causes and report its findings. Hopefully the Congress will implement new regulations on trading in derivatives, including securitized debt, much sooner. Continued failure to monitor and regulate this market will only lead to recurring problems.