Lessons from the Great American Real Estate Boom and Bust of the 1920s
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.
For their comments and suggestions, I would especially like to thank Lee Alston, Michael Bordo, Richard Grossman, Kris Mitchener, Carolyn Moehling, John Landon-Lane, Hugh Rockoff, Kenneth Snowden, Peter Temin, and the participants of seminars at Columbia University, the Federal Reserve Bank of Philadelphia, the Federal Reserve Bank of St. Louis, the Free University of Brussels, the German Historical Institute (Washington, D.C.), the Harvard Business School, the NBER Summer Institute, Rutgers University, the Universitat Pompeu Fabra, the University of Oslo, and the XVth World Economic History Conference, Utrecht. The view expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Lessons from the Great American Real Estate Boom and Bust of the 1920s, Eugene N. White. in Housing and Mortgage Markets in Historical Perspective, White, Snowden, and Fishback. 2014