Booms and busts: the case of subprime mortgages

Booms and busts have played a prominent role in American economic history. 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 brought another financial boom, a postwar boom, and a dot-com boom. ; The details differed, but each of these cases featured initial discoveries or breakthroughs, widespread adoption, widespread investment, and then a collapse where prices could not keep up and many investors lost a lot of money. When the dust cleared, there was financial carnage and many investors learning to be more careful the next time. But fruits of the boom were still around to benefit productivity. ; The late Edward M. Gramlich prepared the luncheon address for the Federal Reserve Bank of Kansas City?s 2007 symposium last summer in Jackson Hole, Wyoming. This article, based on his speech, describes why he believed the subprime lending market, despite its problems, is a promising development that has permitted low-income and minority borrowers to participate in credit markets.(This abstract was borrowed from another version of this item.)