Working Paper: NBER ID: w15573
Authors: Eugene N. White
Abstract: Although long obscured by the Great Depression, the nationwide "bubble" that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates and a "Greenspan put," helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the "Too Big To Fail" doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.
Keywords: real estate boom; financial crisis; monetary policy; housing market; banking system
JEL Codes: E5; G01; G18; G21; N12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's excessively easy monetary policy (E52) | real estate boom of the 1920s (R31) |
| low interest rates (E43) | real estate boom of the 1920s (R31) |
| 'Greenspan put' (E65) | risk-taking behavior among banks and borrowers (G21) |
| risk-taking behavior among banks and borrowers (G21) | real estate boom of the 1920s (R31) |
| absence of federal deposit insurance (G28) | banks remaining solvent despite rising foreclosures (G21) |
| 'too big to fail' doctrine (G28) | banks remaining solvent despite rising foreclosures (G21) |
| securitization and weaker supervision (G28) | real estate boom of the 1920s (R31) |
| real estate boom of the 1920s (R31) | differences in banking system collapse compared to the 2000s (F65) |