Possible source of the financial crisis

Came across this amusing NYTimes item from last October today while looking for something else. Like most everyone, I've been following the Case-Shiller index of real estate prices around the country, an index that was begun in about 2000. What I learned from the Times is that the index itself played a crucial role in laying the foundation of the current financial crisis.

My finance buddies tell me that carving up mortgages did not really begin in earnest until the Case-Shiller housing price index was introduced. Before this, financial analysts did not trust the price numbers, but this changed with the Case-Shiller data. They concluded from the data at the time that the correlation among housing prices across regions was low, so they could bundle and lessen risk.

Some knowledge turns out to not be knowledge at all, just a manufactured illusion.