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This chapter discusses some of the topics the Bank of England Monetary Policy Committee has spent a lot of time on. It first examines the rapid rise in household debt and its implications for monetary policy. The next section looks at the role of asset prices in monetary policy, with particular reference to the recent UK housing boom. Finally, the chapter discusses the implications of the switch in the inflation target at the end of 2003.

Looking back on the real estate boom of the 1920s, economists have grappled with two questions: did it contribute to the depth of the Great Depression, and was it the result of an irrational “bubble” in residential real estate? This chapter examines cross-sectional data on residential construction, house prices and other variables across American cities in the 1920s and the downturn of the Great Depression, finding that cities which had experienced the biggest house construction booms in the mid-1920s, and the highest increases in house values and homeownership rates across the 1920s, saw the greatest declines in house values and homeownership rates after 1930. They also experienced the highest rates of mortgage foreclosure in the early 1930s. These patterns look very much like those around 2006. They are consistent with a bubble. They show that the effects of the mid-1920s boom on house markets were still present as of 1929. They suggest that, in the post-1929 downturn of the Great Depression, house prices fell more and there were more foreclosures because the 1920s boom had taken place.

How far down the social ladder did the building societies reach in order to raise people to the status of home owners during the interwar period? This chapter uses archival data from the case studies to revisit a question that has been debated by past scholars. Building societies expanded the accessibility of loans to working-class households in the interwar period, especially during the 1930s housing boom when large societies competed vigorously with each other for mortgage business. This competition saw many of the larger societies grow exponentially during this period, but with growth came a change in the way in which the firms were structured, substituting their local agency networks for more impersonal systems of branches that were better suited to process the higher volume of mortgage business. This change had ramifications for their efficiency and stability, as can be seen in their riskier lending practices and mixed financial performance.

This chapter contrasts the United States (US) and European situations during the global financial and economic crisis and examines how much of the crisis has been imported by Europe from the US. The chapter argues that Europe never had a chance to avoid contagion from the US. Trade and financial links — some of which operate through third countries, those in East Asia in particular — are simply too powerful. At the same time, domestic conditions were often critical in a number of countries where house prices had generated unsustainable booms, even though there is no European equivalent to subprime lending. The chapter also documents the relatively limited reaction of both monetary and fiscal authorities. The concluding remarks consider the differences that the monetary union has made and their relevance.

After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history. The objective in this chapter is to quantify the contribution of government interventions in housing markets in the expansion of U.S. homeownership using an equilibrium model of tenure choice. In the model, home buyers have access to a menu of mortgage choices to finance the acquisition of a house. The government also provides special programs through provisions of the tax code. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the boom in homeownership in 1960. The decomposition suggests that government policies have had significant importance. For example, the expansion in maturity of the fixed-rate mortgage to 30 years can account for 12 percent of the increase.

Robert Shiller created the most commonly cited time series for nonfarm home values and prices between 1920 and 1940 by splicing a series developed by Grebler, Blank, and Winnick (1956) for 1890 to 1934 with a new series based on 30 asking prices per year in five major cities to extend the series from 1934 to 1953. We develop and examine several alternative measures of housing prices over the period 1920 to 1940. All series show that nominal housing prices fell by 20-30 percent from a peak in the late 1920s to a trough around 1933 and 1934. However, there is substantial disagreement about the values circa 1920 and 1940. For 1920 the Shiller Hybrid suggests that housing values were 5-7 percent higher than in 1930. In contrast, all alternative series show that housing values in 1920 were 6-20 percent lower than in 1930. For 1940 the Shiller Hybrid index rises within 5 percent of the 1930 value. In contrast, all of the other series have 1940 values that are 18.7 to 35.6 percent lower than in 1930. In summary, the alternative measures suggest much stronger growth in nonfarm house prices between 1920 and 1930 and much less recovery by 1940 than the Shiller Hybrid series.

The introduction provides an overview of the historical precedents to the most recent housing crisis, examining how in previous crises falling housing prices, disruptions to financial markets and institutions and declines in consumer spending affected economic downturns. There is a special focus on the American housing busts of the 1920s and 1930s, with attention given to the measurement of housing prices, the resolution of failed financial institutions, and the mid-century scholarship that helped to define current academic and policy paradigms. The causes behind the usually rapid rise in homeownership in post-War World II US that helped to define the current market are investigated. Other essays examine the creation and evolution of mortgage markets in Germany and the Netherlands, providing a striking contrast to American institutions.

This chapter examines the rapid expansion of the mortgage market during the 1920s and identifies the weaknesses built into it that created problems for lenders and borrowers during the 1930s. Mortgage credit grew rapidly during the decade to finance the post-World War I housing boom of the 1920s. A variety of lenders, including building and loan associations, life insurance companies, savings banks, and commercial banks, offered a menu of mortgage contracts. The result was a patchwork mortgage market, consisting of several different types of first and second mortgages. The structure of each contract contributed to the wave of delinquencies during the 1930s, as many borrowers were required to refinance short-term balloon loans under difficult circumstances, while those with longer-term B&L contracts were required to make larger payments than expected. As a result, all of the common contracts of the 1920s became quite unpopular during the 1930s.

Jobs recovered slowly under George W. Bush after the 2001 recession. Growth was boosted by easy credit and a housing boom, but the seeds of the Great Recession were being sown as working-class incomes stayed down. The system crashed in 2008 and unemployment soared. Barack Obama organized deficit spending and job creation, while the Federal Reserve injected trillions of dollars into the economy. Republican resistance and Democratic timidity meant that the federal stimulus was too little by half. The top 10 percent of households recovered faster than the bottom 50 percent. This chapter includes stories of individuals struggling with the loss of jobs and housing. It describes long-term changes that intensify employee insecurity. More jobs are non-union and more employees receive no benefits, face arbitrary schedules, and are classified as independent contractors.

This chapter presents a keynote address at a conference to honor David Dodge, the former Governor of the Bank of Canada. This keynote address examines the financial crisis and sees it as part of a larger problem, particularly a structural problem in the economy. It discusses the past decade’s prosperous economy as well as the housing boom. The address gives a shorthand description of what went wrong in the financial world, what imbalances were present in the current economy, and how these imbalances initiated the crisis. The problem of moral hazard is noted, where the question is, if government action rescued the market once, will it do so again? Thus the concern is that moral hazard will only contribute in the creation of yet another crisis down the road. More importantly, it raises questions for future economic growth, and how this can be achieved.

In this chapter, the author, a first-generation Swedish American, narrates further the story of his father, Oscar Waldemar Lindberg, and his wife Helen as Swedish immigrants in Chicago. After they got married, Oscar and Helen Lindberg settled on Brummel Street in Skokie. Helen’s homesickness had not lessened over the months since she married. She was forced to rely on her husband’s goodwill for a ride back to Norwood Park to visit her parents, Richard and Emma Stone. One event triggered by Oscar and Helen’s marriage was the release from the orphanage of Charles, his son by former wife Evelyn. The author was born in the midst of a housing boom in Skokie, and he could not understand why so many of the old white-haired Swedes his parents would introduce him to over herring breakfasts in smoky lodge halls and the Viking Sport Club in Swedetown vented so much suspicion, venomous ridicule, and loathing toward Jews and other nationalities.

This book has explored the causes and consequences of events leading up to the financial crisis of 2008. It has discussed global imbalances, reckless mortgage lending, unsustainable housing booms, and the malign use of financial instruments, as well as the overly narrow focus of monetary policy, the bank rescue efforts of policymakers, and the proposed reforms and other solutions aimed at saving ailing banks. A range of deeper and more troubling questions remain unanswered, however: why public policy had so little to say about the dangers as they were growing; why so little was done to avert disaster before it was too late; why those who worried were not heard, and those who were heard were not worrying; whether a crash really had to happen before there was political capital to be made out of doing anything about it. A more fundamental question is why the crash was allowed to happen, rather than why it happened.