The Hidden Roots of the Financial Crisis
THE SOURCE: “The Politics of Consumer Debt: U.S. State Policy and the Rise of Investment in Consumer Credit, 1920–2008” by Louis Hyman, in The Annals of the American Academy of Political and Social Science, Nov. 2012.
Don’t blame greedy bankers and hedge fund managers for everything that went wrong in the financial crisis of 2007–08. Decades of poorly conceived government policies set the stage by channeling money into consumer borrowing.
A crucial step, writes Louis Hyman, a historian at Cornell’s ILR School, was the creation of the Federal Housing Administration (FHA) and Federal National Mortgage Association (Fannie Mae) during the Great Depression. Previously, mortgage finance had been the domain of local banks, constrained by local resources. The new institutions tapped much larger sources of capital. The FHA insured mortgage loans, and Fannie Mae bought mortgages from banks and resold them to investors. Under the FHA’s Title I program, moreover, the agency insured small home-improvement loans to consumers. In 1935, lenders committed nearly a half billion dollars to loans for home improvements, an amount several times greater than the budget of the New Deal’s Public Works Administration.
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