Recipe for a Depression

The US needs to heed the lessons of the past and not repeat the spiral of events that led to the great depression. Taking lessons from the past, the government should focus on a Rx that includes creating oversight onto markets that were allowed to operate with none, make it harder for individuals to act out of greed and bring back some of the fixes of the 30s. If we do not it will lead to an economy with many losers and only a few winners (e.g. Joe Kennedy buying up foreclosed homes and renting them back to former owners and insider trading).

History Repeating Itself:

The crossroads between recession and depression is where our housing market is headed. Most people see the stock market crash of 1929 as the start of the depression, however I and others would argue it was the Florida housing bust, blamed on a hurricane of 1926, that caused it.

Land does not always come back up in price. For example, there is still land deeded at that time that individuals paid more for than it is worth now… some of this land was actually purchased under the ocean. To show the same run-up in land has occurred in the past… According to book written in 1931 by Frederick Lewis Allen called Only Yesterday, a strip of land in Palm Beach that a New York lawyer had been offered $240,000 some eight or ten years before the boom; in 1923 he finally accepted $800,000 for it; the next year the strip of land was broken up into building lots and disposed of at an aggregate price of $1,500,000; and in 1925 there were those who claimed that its value had risen to $4,000,000…

Do you think it’s worth more now?

What is important to note is that the housing bust was during good economic times in the mid-20s but was the start of a decade long depression. The 1920s witnessed an increase in loan-to-value ratios and frequent use of high interest rate secondary loans, which is also reminiscent of the recent experience. The money moved out of housing into stock speculation and then just as there was nothing to back the margin calls, homeowners could not refinance their houses in the 30s to get themselves out of debt nor could they sell their houses. At the same time incomes dropped, home values dropped and homeowners could not refinance them.

The Department of Commerce found that, as of January 1, 1934, 43.8 percent of urban, owner-occupied homes on which there was a first mortgage were in default. The study also found that amongst those delinquent loans, many had been late for 15 months. Among homes with a second or third mortgage, 54.4 percent were in default and the average time of delinquency was 18 months.

Thus, at the beginning of 1934, approximately one-half of urban houses with an outstanding mortgage were in default (Bridewell, 1938, p. 172) The housing crash, not the stock market, was the undercurrent that created the Depression. It took the country a decade and a World War to get us out of it.

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