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Securitization’s First Wave of Failures

January 29, 2010

The NY Times’ Floyd Norris has a column today about a surprising paper just out at the National Bureau of Economic Research. Turns out those securitized mortgage derivatives that sank the economy two years ago were not new.

They were just like the ones that triggered the Great Depression.


The original wave of securitizations took place in the 1920s, when the United States went on the greatest building boom ever. Many investors saw how rapidly real estate prices were rising and wanted in on the action. The builders and brokers were only too happy to oblige.

One wonders why we were not told of this by (freshly reconfirmed) Fed Chairman Ben Bernanke, a supposed Great Depression expert.

The paper’s authors, Yale Professor William N. Goetzmann and former Yalie-turned-hedge-fund-guy Frank Newman appear to be economic generalists. Newman dug out the data, according to Norris.

Working Paper abstract:

A substantial retail appetite for real estate securities during this period may have significantly contributed to a real construction boom, but overly optimistic speculation in these securities may have led to overbuilding. The rapid deterioration of these securities and a near complete drop in issuance show, ex post, that investors were overconfident in building fundamentals during the boom years. The breakdown in the value of real estate securities as collateral assets preceded the crash of 1929 and may have contributed to the fall of asset prices more generally.


A major difference between then and now is that most of the real estate securities issued in the 1920s went to build structures, many of which still stand and provide housing or employment. A much greater proportion of real estate securitizations in the last decade went to help people buy existing buildings, an activity that left behind no such legacy.

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