The Borrowers
Debt wasn't always the enemy
The subprime mortgage debacle has given debt a bad rap lately. But there was a time when borrowing money helped establish a strong middle class. Stephen Smith reports.
Buried in debt (iStockPhoto)
More on The Economy, Investing, Housing - Real Estate, America's Financial Crisis
TEXT OF STORY
Kai Ryssdal: For two years and more now, the main thing we've heard about debt is that it's bad. How too much of it, and the wrong kind of it, helped send the economy off the rails. But there are good things to be said about being in hock. Stephen Smith of American RadioWorks reminds us that owing money used to be, and still can be, a ticket to the middle class.
STEPHEN SMITH: Our story begins in 1945.
Radio announcer: We have another bulletin here, Japan surrenders, Japan surrenders. Now repeating, the entire bulletin.
When World War II ended, millions of American servicemen and women returned home. But home was hard to find. After a long war, GIs came back to an acute housing shortage.
Film: We've had a time with housing while you were gone. Building materials and labor went to war.
This government film explained the housing shortage to returning veterans, many of whom had to share crowded quarters with friends, parents and in-laws.
Film: Dottie's folks are swell but a fella would like to spend a little time alone with his wife after three-and-a-half years of community living in barracks and foxholes.
To help the returning vets, President Franklin D. Roosevelt created the GI Bill of rights. The GI Bill offered a sweeping program of benefits, including government-backed home loans. At the time, most Americans were renters, especially people in their 20s -- like veterans.
ED Humes: Owning their own home at that time in their life when they were just getting started in their careers was unheard of.
Author Ed Humes wrote a book about how the GI Bill transformed America. He says that before the government got involved, home loans were something only the better-off could afford.
Humes: Before the war, a typical mortgage was 50 percent down and a relatively short repayment period. But the financial guarantees and funding of the GI Bill made it possible to offer these, then-very-novel, working-class mortgages. Thirty-year mortgages became the standard because of the GI Bill.
If you think about it, Roosevelt may have been the most influential mortgage broker of the 20th century. FDR made it possible for millions of Americans to buy a home and to start building up equity. The GI Bill introduced a whole generation to the potential benefits of long-term debt. When Jerry Ulrich returned to Minnesota from the U.S. Navy, he and his wife Gertrude first tried to get a home loan from their local bank.
GERTRUDE Ulrich: They told us right straight out, "no way."
Gertrude Ulrich says her husband was the son of a fireman, and the couple had little money. They wanted to buy a house in the budding Minneapolis suburb of Richfield.
Ulrich: The credit and loan said, much as we'd like to see you establish yourself in Richfield and move to Richfield and start a family and all those kinds of things, no, we can't. Because you don't have any credit rating, we have nothing to go by. So that's why they suggested the GI Bill.
In fact, the federal government not only backed the Ulrichs' mortgage, the GI Bill paid for Jerry's dental school. It also provided a low-interest business loan so Jerry could set up a practice. With millions of young World War II vets eligible for a mortgages in the 1940s and 50s, there was an explosion of home-building. Author Ed Humes.
Humes: The GI Bill led to the creation of modern American suburbia.
Suburbia meant shopping malls, interstate highways and the baby boom. With more credit available, Americans bought more consumer goods like cars, refrigerators and televisions. The post-war years marked the high-point of American prosperity. Today, as the so-called "greatest generation" passes on, historian Lendol Calder says it will hand down a vast amount of middle-class wealth.
LENDOL Calder: Late baby boomers like myself stand to inherit more than any previous generation in American history.
Even with the current recession, economists say that figure is some $40 trillion or more. Lendol Calder says we have debt to thank, at least in part. Sure, Calder says, credit-cards and home-equity loans made it easy for some people to live beyond their means. But debt also encouraged something else.
Calder: You sign your name on a piece of paper which gives you delivery on something you really, really wanted. But then follows weeks, and months and sometimes years of hard work to pay back on those bills. That's not hedonism, or at least that doesn't look like hedonism to me. It looks like a form of economic discipline.
Back in Richfield, Minn., Gertrude Ulrich and her husband paid their bills on schedule, raised six children and sent them all to college. She says it's all because the government made it possible for a young sailor and his wife to borrow some money, and to work their way into the middle class.
This is Stephen Smith for Marketplace.
Comments
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From Atlanta, GA, 07/02/2009
What book did Ed Humes write?
07/01/2009
1) There were a variety of reasons to build highways--one was looking at the Autobahn in Germany, who's real purpose was to allow troops and tanks to move from one frontline to the opposite side of the country's frontline, faster than the rails helped the Union troops during the American Civil War. As we went into the Cold War, this was an issue for the Pentagon in case of any "Red" invasion. But yes, focusing on highways over efficient public transport had it helpers, sure.
2) Loans are OK if the government doesn't decide to change the interest rates to usury levels.
3) Availible credit allows the middle class to avoid the real problem--the lowering of the paycheck. Advertising taught the middle class that saving--possible with a strong paycheck--was old news, that borrowing for vacactions, house repair, etc was somehow a "cheap" way to pay for these things. Saving for them is cheaper, but has its own sacrifice.
From Los Angeles, CA, 06/30/2009
Scott, Ed...
The songs from each day's show are posted in the right rail above -- under "The Songs."
From WA, 06/30/2009
Regarding Scott Hubbard question: I may be wrong but I'm "guessing" the first music was written by a composer named Leroy Anderson. I haven't listened to that record in over 20 years but it sounds very familiar.
From Anadarko, OK, 06/29/2009
You fail to mention a major downside to long-term mortgage financing. Housing prices (or anything for that matter, even college tuition and healthcare costs) inevitably go up when 'money' is more readily available. Almost all home borrowers today only ask, "What will my payment be?". They don't consider the purchase price to be that important. Also, when interest rates go down, prices go up, and vice versa.
From Arlington, MA, 06/29/2009
It's a pity Mr. Smith didn't "go to Washington" for these key bits of history responsible for post-WWII urban sprawl:
- From the start, FHA loan requirements favored new, segregated, suburban construction, and drove new home buyers away from traditional, land-efficient housing -- a major component of walkable communities within in cities.
- Eisenhower's commission to study the need for new highways dutifully rubber-stamped his vision and led to the federally funded Interstate system, which put more efficient existing mass transit systems (e.g., trolleys) at a fatal financial disadvantage. BTW, the commission included a General Motors board member.
- Federal money helped build _new_ water/sewer systems -- which were needed mainly in the suburbs.
- Federal money helped build low-income housing _only_ in cities, which contributed to white flight.
See, for example, http://www.saveourlandsaveourtowns.org/ppg61700.html
06/29/2009
What's the song playing at 25:30 - 26:00? And at 27:05 - 27:20 (different song). Thanks!
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