The rapid increase in credit-to-GDP ratios since the mid-1980s was just the final phase of a long historical process. The run-up started at the end of World War II and was shaped by a long boom in mortgage lending. One of the startling revelations has been the outsize role that mortgage lending has played in shaping the pace of recoveries, whether in financial crises or not, a factor that has been underappreciated until now.
Pointer from Mark Thoma.
When I read this, I wanted to shout “Underappreciated by who?” Maybe by the macroeconomists who were trained by Stan Fischer, Thomas Sargent, and their progeny. But until Genghis Khan pillaged macro, every macroeconomist knew that housing and mortgage credit rationing were major economic forces in the United States. Until the late 1980s, the process generating recessions consisted of interest rates rising, mortgage lenders losing deposits (because of interest rate ceilings), home buyers losing access to credit, and housing collapsing. And every macro economist knew this.
And even if you are too young to know any old-fashioned macro, you could read Ed Leamer. I would suggest that the authors of this essay try searching for Leamer Housing is the business cycle.
What this essay teaches shows to be underappreciated is Google.
Note that there is more to the essay, which Timothy Taylor found worthwhile.
Leamer’s abstract also suggests counter-cyclical policy towards household formation through interest rates. But does the economy ever feel adequate such that they can follow through? Thus the rules-based policy baseline.
Or as George Carlin said, “we have more places than we have stuff. We need to get more stuff!”