Booms and Busts: The Case of Subprime Mortgages

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Abstract

Edward Gramlich, the Richard B. Fisher Senior Fellow at the Urban Institute and a member of the Board of Governors of the Federal Reserve System from 1997 to 2005, died September 5. In his last paper, delivered at a Federal Reserve Bank of Kansas City symposium shortly before his death, he called for swift action to fix the problems in the subprime mortgage market. The paper was presented by former Federal Reserve colleague David Wilcox, who offered "Four Images of Ned Gramlich" before reading Gramlich's "Booms and Busts: The Case of Subprime Mortgages."

The text below excerpts both the introduction and the paper. Gramlich's complete paper and Wilcox's entire introduction are available in PDF format.

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Four Images of Ned Gramlich

by David Wilcox

Ned Gramlich is in the late stages of a courageous battle against leukemia. When I last spoke with Ned’s wife Ruth on Tuesday (August 28), she reiterated the profound gratitude that she and Ned both feel for the countless expressions of love and support they have received, in many cases from the people in this room.

Before delivering on Ned’s behalf the remarks that he prepared, I would like to take a few moments to sketch four images of this very special person that so many of us have been privileged to know.

The first image is of Ned as policymaker. In executing his responsibilities as monetary policymaker and member of the Federal Open Market Committee, Ned combined his academic understanding with a rare degree of common sense. I will always think of Ned as having been the Sandra Day O’Connor or the Anthony Kennedy of the Social Security Advisory Council that he chaired from 1994 through 1996, because Ned was the one who steered a middle course and designed a package that could have—and should have—found support on both sides of the political aisle. When the nation returns to the issue of Social Security reform, no one will be surprised if the plan that is ultimately adopted closely resembles the one that Ned put forward in 1996.

(End of excerpt. Wilcox's entire introduction is available in PDF format.)

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Booms and Busts: The Case of Subprime Mortgages

by Edward Gramlich

Many of us are in the habit of thinking about productivity as a smooth trend process. Productivity increases at some smooth rate, which in turn results in a smooth rate of capital augmentation and a smooth rate of economic growth.

But even a cursory examination of American economic history, and probably the history of other countries as well, suggests that the process may not really work that way. Productivity often improves in fits and starts; in other words, booms and busts play a prominent role. In the 19th century, the United States benefited from the canal boom, the railroad boom, the minerals boom, and a financial boom.The 20th century saw another financial boom, a stock market boom, a postwar boom, and a dotcom boom.

The details differ, but each of these cases features initial discoveries or breakthroughs, widespread adoption, widespread investment, and then a collapse where prices cannot keep up and many investors lose a lot of money. When the dust clears, there is financial carnage, many investors learning to be more careful next time, but there are often the fruits of the boom still around to benefit productivity. The canals and railroads are still there and functional, the minerals are discovered and in use, the financing innovations stay, and we still have the internet and all its capabilities. A deeper understanding of productivity change should seem to require us to focus not only on trend growth, but also on how these booms and busts work.

(End of excerpt. Gramlich's entire paper is available in PDF format.)

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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