Positive signs of economic recovery -- led by summer gains in house prices touted by industry participants -- should not be overstated as adjustments still need to be made to strengthen the weak economic growth, according to Federal Reserve governor Daniel Tarullo. “After a period in which there seemed to be only two plausible scenarios -- very bad and even worse -- financial and economic conditions have steadied,” Tarullo said Friday in an address to Phoenix-area community leaders. At the same time, he indicated the securitization market often faces blame for the extent of the economic fallout related to a wave of structured finance that failed to perform to the industry's expectations. Instead, the industry should embrace ways securitizations of sound loan products can potentially drive further recovery by providing credit. Tarullo said that each financial crisis has its own narrative, but that each share common elements that must be understood before fashioning a response. “Instead of tulips in the seventeenth century Dutch Republic, South Sea Company stock in eighteenth century England, or the Nikkei and real estate in late twentieth century Japan, we had subprime mortgages and securitizations,” Tarullo said. Tarullo called for an improvement in regulations both centered on financial firms and the linkages between them and the markets that could cripple the entire financial system if failures are realized. The speech was prompted by Tarullo’s conversations with bankers, business people and consumers about a return to normalcy in the credit markets. “During these discussions I have realized that just about everyone understands we will never return to the credit markets of the middle part of this decade, but very few people believe they understand what the 'new normal' will look like once the crisis has fully passed and the economy is on a sustained recovery path,” Tarullo said. “I suspect that this uncertainty is itself an impediment to stronger growth, since it makes financial planning more difficult.” Tarullo said that the industry should welcome the demise of some features of the pre-crisis credit world such as subprime lending. But Tarullo said that securitization is not to blame despite reckless practices and the risk of exotic financial instruments. “There is little to lament in their disappearance. But securitization is not in and of itself a bad thing. On the contrary, a well-functioning system for securitizing well-underwritten loans can make capital available at lower cost to businesses, homeowners, and retail consumers,” Tarullo said. But beyond the complicated structures on Wall Street, Tarullo urged consumers to also make a needed adjustment. “The habit of building personal savings predominantly through appreciation of one's home is one that many Americans will have to change,” Tarullo said. The adjustments by individuals, financial firms, businesses, regulators and nations are a mandatory prerequisite to the end of the crisis, Tarullo said. “How deftly we adjust is the question whose answer will weigh heavily in our nation's economic performance over the next decade,” Tarullo said. Write to Jon Prior.