‘Borrow’ traces the roots of U.S. debt crisis

The drama leading up to the real estate crash of the mid-2000s is becoming as familiar as the Wall Street crash that sparked the Great Depression used to be.

There are plenty of villains: social engineers and market ideologues in Washington; lying bond traders, conflicted credit analysts, careless bank bosses and investment funds on Wall Street; lenders and builders and borrowers across America: All found it profitable not to worry about shaky loans, until they blew up.

Cornell University historian (and ex-McKinsey & Co. consultant) Louis Hyman has written a breezy book that goes deeper. Skimming decades of news, testimony and arcane trade reports, he reminds us that this has happened before, and that there was nothing secret about the public and business decisions that led to cheap money, price inflation, collapse, mass foreclosures, and bailouts.

Americans’ refusal to worry too much about history is a national strength in some ways, but it also makes our recurring financial crises more emphatic.

In the early Republic, Hyman tells us, borrowed money was for rich people only; for everyone else, it was a sign of weakness and impending doom. Speculators, gamblers, and other marginal figures who gave in to weakness and borrowed were liable to wind up in debtors’ jails.

Hyman confuses cause and effect when he writes that “the rising profitability of finance came at a devastating cost as the largest industrial corporations began to see finance as the road to growth” instead of making stuff. In fact, U.S. factories were becoming uncompetitive compared with those of Japan and other low-cost rivals; it’s no wonder corporate America sought more solid returns in financial services.

Fannie Mae and Freddie Mac pushed home-loan finance costs down when they started large-scale home-loan sales through Wall Street banks. Credit card and student lenders did, too. Home prices and consumer debt were soon rising far more rapidly than worker incomes. But since homeowners were worth more, on paper, every year, the new debt seemed to get absorbed, until it didn’t, and the economy froze.

Hyman shows how the Supreme Court, President Jimmy Carter, and Congress effectively gutted state usury laws, giving the credit card business its greatest spur to growth; he ranks Advanta Corp. and First USA Bank among the fastest-growing card lenders of the 1990s, though he misses the biggest such lender, MBNA America, and the lone, much enlarged survivor of that period, Capital One. He incorrectly claims the card banks didn’t take deposits; insured (and, in the case of Advanta’s hard-luck investors, uninsured) deposits were an important part of how credit card banks raised billions to lend.

More substantially, he misses the question of why credit cards, which lack the tax deductibility and government financing aid that home loans enjoy, haven’t blown up nearly as badly or with the same evil consequences as home loans.

Hyman warns us we’re in the “eye of the storm.” The nation is still heavily leveraged. The economy could freeze again when interest rates finally rise and variable-rate debt payments overwhelm borrowers.