Monday, February 20, 2012

Greenspan should have read FOMC minutes from 1950s

An interesting passage can be found in the July 1954 meeting of the executive committee of the Federal Open Market Committee. Allan Sproul from the NY Fed was alarmed at the runaway housing construction funded by cheap no/low-downpayment mortgages sponsored by the Veterans Administration. This points to three interesting possibilities:

1. The seeds of the US housing problem may have been sown shortly after WW-II as cheap mortgages and home ownership "for everyone" became part of the US culture. This is not a "new" phenomenon.

2. The housing issues of the 50s may have been remarkably similar to what we experienced recently, yet they did not end up in a crisis.  On the whole, WW-II veterans did not end up defaulting on their mortgages. What made the recent period different?

3. The US central bank of the period seemed to be more "on the ball" with respect to housing than Greenspan's Fed.

Allan Sproul
1954 FOMC Minutes:  "... Mr. Sproul went on to say that the figures and information on building and construction had begun to seem almost too good to be true. The amount of home building being done with no down payment and with lengthened loan-maturity could, Mr. Sproul felt, spell some later difficulties if the funds were being loosely lent or if the construction covered by such loans was being loosely done. Mr. Sproul stated that there appeared to be some concern about these aspects of the situation on the part of insurance companies and savings banks which were large lenders in the field. He thought that if difficulties developed in the mortgage situation during the second half of this year, there might be presented a difficult problem for the whole economy. Mr. Sproul felt the System did not have enough information regarding mortgage lending and he raised the question whether it might be feasible and desirable to make a special inquiry which would cover not only the amounts of credit outstanding and the amounts of commitments, but would also attempt to develop information on the quality of credits, including information as to the general character of borrowings which underlay the high level of construction. It was one thing if the borrowers were people of steady employment and with an ability and inclination to meet their obligations, whereas it was another thing if no-down-payment loans were being made in substantial number and volume to persons not having the prospect of steady income or any substantial volume of liquid assets and who might quickly become problem borrowers causing damage to the home construction and mortgage market. The volume of no-down-payment loans on VA-guaranteed mortgages highlighted the situation he was pointing to, Mr. Sproul said."

One other item that can be seen in the minutes is that the Fed even back then was becoming interested in the "off-exchange" stock trading.


1954-07-07 Minutes
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