It is not just in economic policies of the Bush administration or Clinton administration that the roots of the current housing market meltdown may be found. The setup of the economy for a pumping and dumping of money into real estate has been an ongoing process since at least the 1970s, a decade of great changes for America and the world in commodities markets and financial innovation.
Compared to the previous decade of the 1960s, foreclosure rates themselves actually decreased during the 1970s, although unemployment rose. Whether this was directly related to the most well-known events of the decade, the oil crises, or not is up for grabs, although the drastic increases in gas prices probably played an important part. Many of the economic policies of the early 1970s, though, were severely negative in their effects on the average American worker and family.
For one, domestic oil production peaked in the early 1970s, which meant that, instead of producing a surplus available for our own consumption or sale to other countries, the nation began importing more and more oil from abroad. Also, President Nixon in 1971 took the US off of the pseudo-gold standard agreed to during the Bretton Woods negotiations after World War II. The value of the dollar was then allowed to float in relation to other currencies around the world, and the loss in confidence in the dollar caused its value to begin dropping immediately. This had an inflationary effect on the economy, driving up prices for everything. Gold, for instance, increased from $35 an ounce in 1970 to nearly $800 an ounce by the end of the decade before falling again.
The oil crisis of the early 1970s was caused by a supply restriction from the Middle East as a result of unfair American support of Israel, as the Arab nations perceived it. In response and to teach the US a lesson, the OPEC nations drove up prices and dropped supply to the American and world markets. The crisis of the late 1970s was due to the Iranian Revolution and drop in supply from that country, which again drove up oil prices in the midst of already high inflation rates.
But inflation can have an effect of increasing equity in homes if real estate prices also rise. The value of actual things, like gold, food, oil, and real estate, typically rise due to inflation. Homeowners experienced rises in the value of their properties that had the effect of giving them enough of an equity cushion to prevent foreclosure in the event of a financial hardship. This decade was also close to a peak in the real income of American workers, who were experiencing high incomes and rising property values.
Until the 1980s, foreclosure rates stayed lower than they had been in the 1960s, but as inflation was combated by the Fed and interest rates driven up to near 20%, prices eventually began falling precipitously. Savings & Loan institutions, one of the main sources of residential mortgage funding, went out of business in droves as they could not make a profit on low-rate mortgages due to regulatory burdens, and foreclosure rates began to rise again.
Finally, the 1970s saw the first securitization of residential mortgages as Wall Street investment firms packaged loans and sold them off to other investors. Although these new securities were based on conventional mortgages with predicable default rates, the seeds of the subprime securitization fiasco were being planted as banks realized how much money they could make collecting fees on mortgages every step of the way.
Many of the economic policies of the 1970s and 1980s helped cause the rise of foreclosure rates and the seeds of the current mortgage crisis may be found in these same economic policies. Homeowners and workers won a few small economic victories against the banks due to the high inflation rates but fortunes were quickly reversed in subsequent years. It was not until the 1980s that the effects were felt more dramatically by American homeowners in the higher numbers of foreclosures.