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Louis Hyman

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A Brief History Of Debt

Posted: 01/25/2012 11:04 am

If you listen to our grandparents, in the old days nobody ever borrowed. Angelic models of virtue, they bought only what they could afford. The Great Depression had instilled values in them that these young people today just do not have. On some level, older Americans consider all this borrowing to be a moral failure without precedent.

The historical record would beg to differ. In my new book, "Borrow: The American Way of Debt," I show how personal debt became widespread in the 20th century--and it didn't just happen in the past few years. Paradoxically, it was the very prosperity of that postwar generation that enabled so much borrowing to occur because it was in the postwar that bankers began to discover how profitable it could be to lend to consumers. The good wages of the postwar made profitable borrowing possible. As those good jobs faded, the borrowing remained. Unlike our parents and grandparents, we borrow but we just don't earn enough to pay back what we borrow. But don't let my words convince you.

Balloon mortgages
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In the boom years of the 1920s the housing market exploded. Homebuyers relied on short-term, interest-only balloon mortgages to buy their dream homes, expecting to refinance every few years. Behind all those new balloon mortgages were bonds, like this one here from the National Archives. Investors bought them from banks which in turn lent the money to homeowners. Since home prices were expected to continue to rise, it was a secure investment. After the Stock Market Crash of 1929, investors stopped buying these bonds and thus when the homeowners went to refinance, they found they could not, contributing to the collapse of the housing market in the Great Depression. By the mid-1930s, these kinds of bonds were no longer available.
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