Evan Soltas
Sep 25, 2012

Housing in the Great Depression

The role of housing in the Great Depression is the focus of my latest piece in Bloomberg. What people don't remember, perhaps because of how important Friedman/Schwartz and Bernanke are to our understanding of the Depression, is that the housing boom of the 1920s positively dwarfs that of the 2000s. I think that should raise some real questions about the power of the housing channel in the application of monetary policy and the apparent intensity of its influence over aggregate demand.

Milton Friedman and Anna Schwartz famously pinned the Great Depression on passive tightening of monetary policy, and Fed Chairman Ben Bernanke and other scholars highlighted the role of the gold standard and the collapse of international monetary order. But economists and commentators have largely overlooked the role of housing in the causation and intensification of the Great Depression.

After an encore performance of macroeconomic calamity, this long-standing oversight deserves correction...

The magnitude of the 1920s bubble was even more impressive in terms of construction. Housing starts more than doubled, as did the real value of residential construction. That is four times as large as the housing boom of the 2000s...

The stories of the 1920s and the 2000s are parallel even in the way the bubbles popped. In both instances, the housing market cooled early but gently, transferring speculation into stocks. The broader economy overheated and then fell into contraction, leading to sharp markdowns in real estate asset values, which precipitated true crisis. And in both cases, interest rates were forced to the zero lower bound as problems in the housing market disrupted a key component of the transmission mechanism of monetary policy.

The similar role played by housing in the Great Depression and Great Recession is remarkable. How is it, after all, that housing was a key player in the two largest recessions of the modern era? The connections merit new inquiry.