The Anatomy of a Credit Crisis

|Peter Boettke|

That is the title of a new NBER working paper by Ragu Rajan and Rodney Ramcharan.  The full title and abstract are:

The Anatomy of a Credit Crisis: The Boom and Bust in Farm LandPrices in the United States in the 1920s.by Raghuram Rajan, Rodney Ramcharan 

Abstract:
Does credit availability exacerbate asset price inflation? What channels could it work through? What are the long run consequences? In this paper we address these questions by examining the farm land price boom (and bust) in the United States that preceded the GreatDepression.  We find that credit availability likely had a direct effect on inflating land prices.  Credit availability may have also amplified the relationship between the perceived improvement infundamentals and land prices.  When the perceived fundamentals soured, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates.  Land prices stayed low for a number of decades afterthe bust in areas that had higher credit availability, suggesting that the effects of booms and busts induced by credit availability might be persistent.  We draw lessons for regulatory policy.

 

Comments

[J Oxman]

Interesting paper, but they did not address the role of the Federal Farm Loan System, created in 1916, which was designed to lend to small farmers. Also, they did not address the WFC, charged with supporting US exports after ww1. WFC impact may have been minimal, but expectations of export subsidies of agricultural products would increase the present value of land & support more credit.

The situation seems rather akin to mortgage support by Fan and Fred.

I also don't think their policy recommendation follows since now banks are much more geographically diversified.

[Greg Ransom]

This sort of mechanism can be found in Hayek's causal model:

"Credit availability may have also amplified the relationship between the perceived improvement infundamentals and land prices. "

[John]

Is there anything which is not found in Hayek's works??

[McKinney]

John, I know only a fraction of Hayek that Greg knows, but so far I have found very few major discoveries in economics since WWII that Hayek and Mises did not anticipate.

For example, Cowen once claimed on his blog that a particular paper on unemployment was the most important paper published in several decades. I can't remember the paper. But after reading it, I realized it was not much more than Hayek's Ricardo Effect put to math.

[Brad]

Pete

Have you looked at any of Alan Taylor's recent work on credit booms gone bust?

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