Preliminary

Similar in magnitude to the recent real estate boom and bust, the first nationwide twentieth century “bubble ” appeared in the early 1920s and burst in 1926. While fundamentals, including a post-war construction catch-up, low interest rates and a “Greenspan put, ” played a role in its inception, the boom developed its own momentum, particularly in hot regional markets. Alternative monetary policies would have dampened but not eliminated the boom. Both booms were also accompanied by securitization, a reduction in lending standards, and weaker supervision. The collapse in the twenties drove up foreclosures but did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail ” doctrine, and federal policies to increase mortgages to high risk homeowners. This comparison suggests that the combination of these policies induced increased risk-taking in the banking sector that was crucial to the eruption of the recent and worst financial crisis since the Great Depression