These interventions intensified duringrnand after WWII with the GI Bill, VA guaranteed loans, and growth in popularityrnof FHA loans.  Aided by such policies andrnprograms, American homeownership increased from 40% in the 1930s to nearly 70%rnby 2005, one of the highest rates in the developed world.</p

So, has the postwar democratization ofrnleverage affected the larger economy?  Thernauthors point to studies that cite debt overhang as a possible cause for slowrnrecoveries from financial crises and say that their own new data “open the doorrnto a new intriguing question: Are all forms of bank lending-particularlyrnmortgage lending-equally relevant in understanding these business cyclerndynamics?”  To answer that they used datarnon 17 advanced economies since 1870, capturing about 200 different recessions,rnone-quarter of which are linked to a financial crisis.</p

In retrospective analysis it can berndifficult to separate cause and effect, they say, so in examining the effect ofrnbank lending on business cycle dynamics they first used the arrow of time to considerrnthe effect of lending during an expansion on the subsequent recession; that isrnthe future cannot cause the past. Second, they incorporated methods to minimizernother factors that might confuse the story.</p

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The two panels in Figure 3 split therndata into the pre- and post-WWII periods and for each panel the real GDP perrncapita is set to 100 at the start of a recession; its evolution in cumulativernpercent deviations is traced from this point. In the control scenario, shown byrnthe solid lines, both mortgage and nonmortgage lending are set at the averagernhistorical levels observed in the expansion. Two alternative scenarios are thenrnconsidered.  One compares the evolutionrnof GDP per capita if nonmortgage lending in the expansion had grown onernstandard deviation above average, shown by the dotted lines. In the otherrnscenario, mortgage lending in the expansion is allowed to grow one standardrndeviation above average instead, shown by the dashed lines. Recessions that arernlinked to financial crises (shown in red) are separated from those that are notrn(shown in blue) to avoid conflating the special conditions typical of financialrncrises. The gray shading shows a 95% confidence region only around the solid bluernline for normal recessions to avoid complicating the figure.rn</p

The authors say this figure confirmsrnseveral well-known results and provides some new ones. First, recessionsrnassociated with financial crises are deeper and last longer, no matter whenrnthey occurred.  Second, it was harder tornrecover from any type of recession in the pre-WWII era than later. The typicalrnpostwar recession lasted about a year. After two years, GDP per capita hadrngrown back to its original level and continued to grow for the next threernyears. Financial crisis recessions lasted one year longer and only returned tornthe original level by year five. </p

More interesting are the twornalternative scenarios in which credit in the expansion grows above average. Arncredit boom in either mortgage or nonmortgage lending makes the recessionrnslightly worse prewar, especially when associated with a financial crisis. “Butrnin the postwar period an above average mortgage-lending boom unequivocallyrnmakes both financial and normal recessions worse. By year five GDP per capitarncan fall considerably, as much as 3 percentage points lower than it would havernotherwise been. In contrast, booms in nonmortgage credit have virtually norneffect on the shape of the recession in the same postwar period.” </p

The three say they can only speculaternon why there is a difference but conclude that “a mortgage boom gone bust isrntypically followed by rapid household deleveraging, which tends to depressrnoverall demand as borrowers shift away from consumption toward saving. This hasrnbeen one of the most visible features of the slow U.S. recovery from thernglobal financial crisis.”</p

The paper concludes that much of thernrecent expansion in bank lending took place through real estate lending, arnfactor that appears to have the most relevant macroeconomic effects and thusrnthe need to revisit current economic policy.  

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