Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail” doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.
The Fed’s early foray into open market operations played a role during that time too. That narrative doesn’t fit well with the “deregulation” mania that folks argue caused the latest crisis. But real estate bubbles have happened throughout history (South Sea bubble, for example). Maybe (as Arnold Kling advises) we should focus less on preventing future bubbles and focus more on mitigating the damages inflicted when the next one inevitably breaks.
