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Housing in particular was a focus of the New Deal policy.
The housing industry, by 1934, was only 1/10 the size it had been in the 1920s.
A huge fraction of all the people on relief
were actually construction workers.
Now, construction is a very crucial part of the American economy in the 1930s.
During the '20s, it and automobiles had really driven the economy.
And it's a very special part of the economy because of something
called linkages.
So that when you build a house, you need nails.
You need wood.
You need all kinds of things that go into the house.
And you also need both unskilled and skilled labor.
And so a house really connects, multiplies out,
ripples into the economy around it.
And so New Deal policymakers saw that, if they
could get the housing industry going again,
they could get America going again.
Now, the challenge in all of this was that mortgage markets
have collapsed after the crash.
They had collapsed for many reasons.
One of the important reasons was that there
was a sudden withdrawal of investment by banks in mortgages.
This happened because of the kinds of mortgages
that people received in the 1920s.
Now, today in America, the standard mortgage is a 30 year fixed mortgage.
This is what we think about as a normal mortgage.
But in the 1920s, there was a great variety in the kinds of mortgages
that one could get for a house.
There were short mortgages that were three to five years, balloon mortgages
where you only pay the interest, so it was
kind of like you were only really renting the house.
There were 10 year mortgages that were self-liquidating
so you pay the interest and the principal and over time,
at the end of that 10 years, you could actually own your house.
Now, these balloon mortgages made up a huge part of the mortgage market.
And at the end of that three to five years,
you would have to refinance your house, very similar to balloon mortgages
during the recent financial crisis.
And like those balloon mortgages of the recent financial crisis,
they were funded by bonds.
And so these local banks would sell bonds to investors
to fund these mortgages.
And what would happen was that, at the end of the few years,
you would expect you would go into the bank and refinance your house.
Well, that didn't happen after the crash.
People started to stop investing in these bonds
and, suddenly, banks couldn't refinance all the mortgages
they had given people.
And then they went into foreclosure.
And, suddenly, the very nature of the financial instrument,
of that balloon mortgage, led to the collapse of American housing markets.
And so there's a very deep connection not just between the macro-economy
and housing, between the way in which lending happens
and the housing crash of the Great Depression.
So to stop the sudden free fall of these markets,
there was a program called the Homeowner's Loan Corporation that
swapped government bonds for these mortgages.
And the government took on the risk of owning these mortgages
and it stopped the free fall.
But not everyone could get them, and it was not
enough to restart the mortgage markets.
It was only a way to stop the bleeding out of American home value.
So how do you fix this?
How do you take something that is so important to getting the economy going
again and, at the same time, so dependent
on all different kinds of players in the financial system?
And, at the same time, not spend any government money?
Right?
Because this is too big for the government to take over.
The answer is the Federal Housing Administration.
Now, what's exciting about the Federal Housing Administration
is that it's basically a government run insurance
policy that gets housing going again.
So in 1934, the National Housing Act re-imagines everything about housing
from the ground up, from how you borrow to who invests in the mortgage.
So how does it change things?
It changes things because, instead of you just going out and buying a house
and then trying to find a borrower, the government steps in
to set up a series of standards about how houses should be built.
If they follow these standards, then the mortgage
is already pre-approved as long as you can put 20% down.
Which is actually much less than it had been before then.
This mortgage, then offered by a mortgage company or a local bank,
is then sold to an intermediary called the Federal National Mortgage
Association or, as it came to be later called, Fannie Mae.
Fannie Mae would then sell this mortgage to an investor, especially an insurance
company, who had all this money piling up from policies
and needed to be invested somewhere.
And so in this process they do a few different things.
They say, we're going to make sure there's
a good quality of housing that's being built, not speculative housing.
We're going to connect these New York insurance
companies with far away lenders so that people in Texas
can borrow from people in New York.
And perhaps you're thinking, why couldn't they do that before?
Well, how is a New York investor going to know what kind of house
is being built in Texas?
Investors don't usually lend money for things they can't see.
And this is the genius of the standards.
So the FHA creates standards for lending,
creates a market for the exchange of investor and borrower,
and doesn't actually lend any money itself,
so that money can flow from New York around the country
and get those houses being built and get those mortgages being made.
And in the process, they managed to avoid this problem of refinance.
The new FHA mortgages that people received
were both cheaper than older mortgages-- only 5% interest--
and, at the same time, they were longer, starting
at 15 years and then very quickly 20 and 30 years.
These long mortgages meant that there would
be no overlap between the refinance and the business cycle,
as there had been with the mortgage crisis of the bonds.
And so these long term mortgages, these safe investments, these good houses,
lead to a boom in housing construction in the US
and lead, eventually, to the rise of suburban housing in America.
This entire system is predicated on focusing not on government spending
but on the re-channeling of private capital,
so that the government is not spending to build these houses.
It is simply creating the mechanism by which
money can be invested in private hands.
And so this process rejuvenates capitalism.
And so, whether it's in the Rural Electrification
Administration, the FHA, or in other programs,
there is this other New Deal that re-channels capital into investment
and brings about a resurgent prosperity.