Abstract

"A Creditor’s Market: How the Volcker Shock Changed the Political Economy of American Home Ownership, 1979-1987"

Aaron Freedman, Columbia University (alf2212@columbia.edu)

This paper argues for understanding the Volcker shock—the period from 1979 to 1982 when the Federal Reserve under Paul Volcker pushed interest rates to historic levels, driving down inflation but plunging the country into a deep recession—as a pivot point in the political economy of American homeownership. For the first time since the Depression, federal policymakers, led by the Federal Open Market Committee, turned against homeowners. Determined to stamp out inflation once and for all, Volcker and his allies in the Fed made a concerted push to kill homeownership as a full-proof investment for the rising middle class. While past periods of Fed tightening were accompanied by credit crunches in which mortgage financing dried up, the deregulation of credit in the 1970s and early 1980s meant that affluent homebuyers could access mortgage credit at astronomical interest rates, while homebuyers of modest means—the very group that New Deal housing finance policies had targeted—were left in the lurch. But while the Volcker shock had succeeded in making homeownership a bad investment for homeowners—in other words, borrowers—it transformed home financing into a more lucrative investment than ever before for creditors and financiers enticed by high rates and liberated by credit deregulation. The Volcker shock thus ushered in a new era of the homeowner economy, in which the gains from debt-financed home purchases flowed increasingly to creditor-investors and the financial service industry rather than upwardly mobile homebuyers. Though the homeownership rate and home prices would eventually recover, and reach new heights, as the Clinton and Bush administrations pursued policies for increasing homeownership among racial minorities, such “predatory inclusion” ultimately benefitted the financial sector more than the new class of homeowners who were abandoned by policymakers in the wake of the 2007 housing crash and 2008 financial crisis.