The Debt Bomb
When wages stagnate and inequality rises, Americans try to borrow their way toward the American dream. Inevitably, the bubble bursts. But we can learn from the lessons of 1929.
Dick and Jane Smith met shortly after they moved to the city. Sparks flew, declarations of love were exchanged, and rings and vows inevitably followed—and then they began their search for a home of their own. Though he didn’t have a college degree, Dick had recently found work in a new industry that was sweeping the country. The company’s initial public offering a few years back had been one of the most successful in history. Dick and Jane, like the rest of the country, were caught up in the heady optimism of what pundits called a new era of perpetual growth.
Flush with love and short on cash, the Smiths went to their local bank to find out if they could get a mortgage. After a few calculations, the mortgage officer informed them that an “amortized” mortgage—which required payments on both interest and principal every month—would not get them the house they wanted. Dick’s income was just not enough to cover the payments, but there was another option that, the loan officer told them, most smart people were using these days: an interest-only “balloon” mortgage. It would allow them to buy a house immediately, and sleep soundly with the knowledge that their household income had nowhere to go but up, along with real estate values. When the time for bigger payments finally came a few years down the road, they could simply refinance with a new loan.
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Louis Hyman teaches history at the Industrial and Labor Relations School at Cornell University. This essay is adapted from his new book, Borrow: The American Way of Debt. Copyright 2012 by Louis Hyman. Published by arrangement with Vintage Books, an imprint of the Knopf Doubleday Publishing Group, a division of Random House, Inc.more from this author >>