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Comments on “The Origins of the American
Mortgage Disaster and Its Lessons for Reform”
by Eugene White, FMG-CCSB conference, Feb
29, 2012
John Muellbauer
Nuffield College and Institute for New Economic
Thinking at the Oxford Martin School
Chief culprits
• Eugene White’s careful historical comparison of
the 1920s housing boom/bust with no banking
collapse with that of the 2000s asks: what was
similar? what was different?
• His answer emphasises 3.5 differences:
• Governance of banks
• Deposit Insurance/Too Big to Fail
• President/Congress Push for Affordable
Housing/RE Lobby
• Fannie Mae/Freddie Mac
Good use of evidence
• But suggests that 1920’s building boom partly explained by
catch-up after WWI
• price ‘bust’ after 1925 was less severe
• little sign of immediate contraction in mortgage debt/GDP
• Problems postponed to 1930s, and not closely linked to
shocks originating in housing or mortgage markets
The other factors: how similar is similar?
1. Monetary Expansion: some similarities, as Fed (founded
1913) stabilised interest rates after WWI – but then less far
off ‘Taylor rule’ than in 2000s. Mortgage rates were very
stable (around 6%), not falling as in 2000s.
2. The ‘Greenspan Put’: in the 1920s, the Fed also wanted to
stabilise financial system but 1920s were not stalked by
(mistaken) fear of Japan-style lost decade after collapse of a
stock market bubble. No risk of weak demand given
domestic and global demand for US output after WWI.
Other factors…
3. International Imbalances---U.S. net creditor so imbalances had
the opposite sign. External investment opportunities kept up
real interest rates.
Contrasts with currency-manipulating Chinese etc purchases of
US govt. bonds, closely linked to US mortgage rates, pressing
down mortgage rates.
Also European investors, searching for yield in low yield
environment were easily conned into buying AAA-rated MBS
junk.
Other factors…
4. End of Glass-Steagall similar to pre-Glass-Steagall 
Universal Banking
5. Relaxation of Bank Lending Standards: some similarities
e.g. building and loan associations offering piggy-back
loans. But all evidence points to far lower LTVs for firsttime buyers in 1920s than 92-3% average reached in
2003-6.
6. Failure of Bank Supervision: some (political influence of
bankers then and now?)
7. Securitization/Derivatives: e.g. growth of mortgage
bonds; title and mortgage insurance co’s – but scale
was much smaller
8. Rating Agencies: Moodys ‘not stringent’ then either.
The 3.5 main culprits
9. Greedy/Predatory (Risk-Taking Leveraged) Lenders?
partial NO: Double Liability, Better Governance
structures suggest less serious problem in 1920s.
10. Greedy/Ignorant (Risk-Taking Leveraged) Borrowers:
human nature is ever so
11. NO: Moral Hazard: Deposit Insurance/Too Big to Fail
12. NO: President/Congress Push for Affordable Housing/RE
Lobby
13. NO: Fannie Mae/Freddie Mac
Omitted factors
• Income tax with interest relief started in 1913 – but modest
tax rates on all but highest incomes, and top tax rates slashed
in 1920s. So tax incentives to get into debt for mass of
households were much lower. Hh debt to income ratios were
lower, so hhs less vulnerable.
• Our research highlights this vulnerability, missed by focus on
net worth concept of wealth for understanding consumption.
• Unsecured debt was much lower too, before credit card
revolution; for a comparison with the 1920s, see Geisst, C. R.
2009. Collateral damaged: The marketing of consumer debt to
America. New York, NY: Bloomberg Press.
• When did no-recourse mortgages start?
Financial accelerator in the 1920s missed the
2nd channel, and 3rd and 4th were much weaker
(John Duca graphic)
Mortgage and
Housing Crisis
Lower Demand
for Housing
Less Home
Construction
Lower Capital of
Financial Firms
↓Home Prices &
Wealth, Slower
Consumption
↑ Counter-Party
Risk, Money &
Bond Mkts Hit
Slower
GDP Growth
Credit Standards
Tightened
on All Loans
3
In the 1920s, the aggregate consumption effect
of higher house prices was likely negative
Our research (Aron, Janine, John Duca, John Muellbauer, Keiko Murata,
and Anthony Murphy (2011), “Credit, Housing Collateral and
Consumption: Evidence from the UK, Japan and the US”, online at
Review of Income and Wealth. DOI: 10.1111/j.14754991.2011.00466.x)
shows housing wealth had zero or negative effect on (conventional
national accounts) consumption before credit market liberalisation
in US, UK, Australia and South Africa (and remains negative in
Japan).
With low LTVs in 1920s US, aggregate effect would have been negative
as potential first time buyers saved more for a down-payment and
as renters could expect to have to pay higher future rents.
Hence stabilising macro feedbacks through consumption channel in
1920s.
The time varying marginal propensity to consume out of housing
wealth in the US
11
Feedbacks via banking, credit market channels
now also much larger.
Hence I’d put more weight than EW on
5. Relaxation of Bank Lending Standards
6. Failure of Bank Supervision
7. Securitization/Derivatives: remember Ragu Rajan’s
prescient Jackson Hole warning in 2005 that these
extreme levels of innovation had amplified global
financial risk.
8. Rating Agencies.
I agree on the importance of his 3.5 main culprits.
However, deposit insurance is controversial: would have
prevented bank-runs of the 1930s. Did lower levels of
deposit insurance in the UK constrain risk-taking by
UK banks?
I highly recommend EW’s 2010 NBER paper – more
subtle than my simplified summary of the issues.
Comments on “Achieving Housing Market
Equilibrium: Some Policy Options” by David
Greenlaw, FMG-CCSB conference, Feb 29,
2012
John Muellbauer, Nuffield College
and Institute for New Economic
Thinking at the Oxford Martin School
Broad agreement with David Greenlaw
• DG paints colourful and comprehensive picture of
the great US housing and mortgage disaster.
• Our own research confirms much of what he says.
• But we put more weight on the green shoots given
our econometric modelling of the housing market
and the interactions with the wider economy.
Broader version of the vicious circle
Mortgage and
Housing Crisis
Lower Demand
for Housing
Less Home
Construction
Lower Capital of
Financial Firms
↓Home Prices &
Wealth, Slower
Consumption
↑ Counter-Party
Risk, Money &
Bond Mkts Hit
Slower
GDP Growth
Credit Standards
Tightened
on All Loans
3
Yes, foreclosures do matter for the wider
economy
• but bivariate correlations are suspect
Yes, economic and credit conditions have been
really terrible, but houses are cheap and progress
on deleveraging
Housing Affordability Index
Household Debt Service
Percent of Disposable Personal Income
19.0
200
18.5
175
18.0
17.5
150
17.0
125
16.5
100
16.0
75
15.5
15.0
50
82
86
90
94
98
02
06
Source: National Association of Realtors
Note: Index = 100 when median family income qualifies for an 80%
mortgage on a median priced existing single-family home. Rising index
indicates more buyers can afford to enter market.
10
80
84
88
92
96
00
04
Note: Financial obligations series, values for 2011 Q4 to 2012 Q4
represent Morgan Stanley estimates.
Source: Federal Reserve Board and Morgan Stanley Research
08
12
Credit conditions easier since 2010 for consumer
credit, and starting to ease for prime mortgages
Yes, monetary transmission mechanism has
been impaired – but far from eliminated
• We capture this through the decline in the mpc of housing
collateral.
• We also model refis and equity withdrawal, with same
common latent variable which drives mpc of housing.
Yes, economic and credit conditions have been
really terrible
• But payment delinquencies are down and house
prices (excl. distressed) have almost stopped falling
6Mortgage
Foreclosures and Delinquencies
20
Percent
15
5
National HPI
excluding
Distressed
10
Mortgage Payments Past Due
90+ Days
4
5
0
(5)
3
(10)
Mortgage Foreclosure
Pipeline (EOP)
2
National House Price
Index
(15)
(20)
00
1
01
02
03
05
Source: CoreLogic / Haver Analytics
0
88 90
92 94 96
98 00 02
Source: Mortgage Bankers Association
04 06 08
10
06
07
08
10
11
Green shoots in house prices: dynamic
simulation of rent based US hp model
• Based on 2-equation model, incl. model for rents.
• Rent model suggests rents respond v sluggishly to hp, general
price level, and to user cost.
• Income-tax credit of 10% of a home’s purchase price up to a
cap of $8,000 for couples who were FTBs, expired in June
2010, provided major support in 2009-10.
• US house price forecasts made in Dec 2009 by Duca, Murphy
and myself correctly foresaw second leg of house price falls
after tax credit expiry in June 2010, and predicted bottom in
2012.
http://www.aeaweb.org/aea/conference/program/retrieve.p
hp?pdfid=446
short form of paper: Duca, J. V., Muellbauer, J. and Murphy, A.
(2011), “House Prices and Credit Constraints: Making Sense of
the US Experience”. Economic Journal, 121: 533–551.
21
Our new US hp model confirms Dec 2009
simulations*
• “Shifting Credit Standards and the Boom and Bust in U.S.
House Prices”, Duca, Muellbauer and Murphy
• New model (consistent with hp/rent model) is based on
inverted demand approach: hp driven by income relative to
housing stock, user cost, and LTV for first time buyers.
• Model implies over-shooting and shock amplification in
booms as user cost uses last 4 years appreciation and enters
as a log. Despite low mortgage rate, user cost has just been at
40 year high and is beginning to decline.
• Rise and then collapse of LTV was major factor in boom/bust.
*Note usual Fed disclaimer, as Duca and Murphy at Dallas Fed
LTVs for first-time buyers and all buyers are quite
different
Our point forecast is for trough in 2012Q3, perhaps
earlier for Case-Shiller
New paper (24 Feb)
“Housing, Monetary Policy, and the Recovery “,
Feroli, Harris, Sufi & West
• Highlights frictions slowing shift from owner-occ. to rentals
and rising rents (welcome reminder that hp is determined not
just in owner-occupied market)
• Argues that despite 9% vacancy rate in rentals, ‘seismic shift’
of 5-6m additional renters would overwhelm current rental
stock.
• “nearly 250,000 REOs (‘Real Estate Owned’) held by Fannie,
Freddie and the FHA and about 3.0 million additional
government mortgages will be liquidated over the next four
years”: bulk sales to private investors?
DG discusses 3 policy options
1. Streamlined Refi: limited success
2. Rentership: convert owners to renters of existing
dwellings – yes! see above.
3. Mortgage Modification (with Shared Appreciation)
• The last would be a brilliant option: if done on large scale
would give quick help to many and be ultimately very
profitable for the government.
• US presidential election could be a close call if oil price
shock or Eurocrisis derailed US recovery. Otherwise
optimistic on prospects both for US economy - and
Obama.