The Panic of 2008
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The Panic of 2008

Causes, Consequences and Implications for Reform

Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr

The Panic of 2008 brings together scholars from a variety of disciplines to examine the causes and consequences of the global credit crisis, the subsequent collapse of the financial markets, and the following recession. The book evaluates the crisis in historical context, explores its various legal, economic, and financial dimensions, and considers various possibilities for reform. The Panic of 2008 is one of the first in-depth efforts to study the crisis as it was in the very earliest stage of resolution, and establishes a foundation for thinking about and evaluating current reform efforts and the likelihood of recurrence.
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Chapter 2: The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s

Kenneth A. Snowden


Kenneth A. Snowden, Jr. INTRODUCTION The residential mortgage crisis that triggered the Panic of 2008 is more severe, in terms of rates of foreclosure and decreases in home prices and residential wealth, than any since the Great Depression. We should look back to the 1930s for more than benchmarks of misery, however, since it provides an opportunity to examine the origins, impacts and consequences of one severe mortgage crisis as we live through another. In this chapter I identify four elements that shaped the 1930s crisis and define its long-run impact on the nation’s mortgage market: 1. The crisis was preceded by a decade during which the nation’s residential mortgage debt grew at an unusually rapid pace while financial innovation reshaped the mortgage market itself. Three innovations of the 1920s figure prominently – high-leverage, affordable home mortgage loans, private mortgage insurance and two early forms of securitization. Each of the intermediaries that brought innovations to the market in the 1920s suffered prolonged liquidations during the 1930s. These complex processes were publicly-managed but not publicly-financed. Federal emergency measures, including a publicly-financed ‘bad bank’ (the HOLC), strengthened institutional portfolio lenders while the innovators of the 1920s were liquidating. Additional regulatory change created institutional structures within which these portfolio lenders dominated the residential mortgage debt for the next four decades. Proposals were offered to incorporate each of the innovations of the 1920s into new federal programs. One effort – for high-leverage, insured mortgages – succeeded in the form of the FHA loan program; 51 2. 3....

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