Thursday, January 12, 2012

The mid-90's and the housing/banking crisis befuddles me. Help me understand, please...Do these graphs make sense??

The first graph is from my post yesterday.  It shows the growth in home ownership and the huge spike starting about 1993-94.  It started the trend towards recovering previous losses in home ownership starting in 1977 (notice the decline, then leveling off) and quickly surpassed the previous high established in 1977.



The time period 1993-94 in terms of the dramatic increase in home ownership intrigues me.  In order for this to occur it seems reasonable that the Federal Reserve would have to increase the money supply in order to decrease interest rates to incentivize people to take out loans to buy houses, right?

The graph below shows the growth, in billions, of the "cash" money supply (aka "M1 Money Stock") in the banking systems that banks presumably lend out to borrowers.  Notice that towards the end of 1993 the M1 Money Stock actually DECREASES then levels off until 2001.  In your mind, isolate the time period 1993 to 2001 on both these graphs and ask yourself: "How can the money supply decrease but the "money" to buy houses increases?  There seems to be an inverse relationship! What is up with that???



The graph below from The New Arthurian Economics is important to understanding how this happened. It shows the  "Debt per Dollar" in circulation (M1 Money).  Isolate the Debt per Dollar change during the time period discussed above.  Notice the steep slope indicating a rapid rise in Debt per Dollar, going from a ratio of 15-1 to 25. That is an increase of 66% in under 7-8 years.

Source: The New Arthurian Economics
Another way to look at it is each dollar in circulation is loaned out (leveraged)  multiple times.  We know this better as "credit". 

What happened in 1993 (that did not happen to a significant level prior to this date) to create the conditions for the rapid formation and use of credit in the US?

Am I just too narrowly focused on the mid-90's and missing something?  Help me, please.
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1 comment:

  1. The ArthurianJanuary 22, 2012 at 10:36 AM

    Oh, I missed this post I guess. (Thanks for the link.)

    Calculated Risk says (blandly) that "The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending."

    Innovations? A bit vague. There must have been something in the Clinton Tax Code that opened a door.

    I remain confident that the 1990-1993 fall in debt-per-dollar created "slack" in the financial system and paved the way for the 1994-2000 burst of debt growth.

    The Clinton taxcode, then, would have been able to take advantage of that financial slack, to produce the housing bubble.

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