Mortgage Finance (The 1970s): Inflation, Stagflation, and Disintermediation

Mark Justin
5 min readDec 31, 2019

A bank holds a loan in its asset portfolio and funds it with low-cost deposits (also known as “portfolio” or “spread” lending). Holding loans in portfolio and funding them with low-cost deposits, works as long as interest rates were stable, and there was a readily available supply of deposits. This model broke down in the 1970s when market interest rates soared in response to rapid increases in both wholesale and consumer prices.

The seeds of inflation were sown in the previous decade (the 1960s), arguably when the U.S. government expanded its role in the economy tremendously. Simultaneously, the U.S. government carried out an expensive war in Southeast Asia, launched several ‘Great Society’ programs designed to promote upward mobility among disenfranchised Americans, and eventually landed a manned spacecraft on the moon. These initiatives provided a sizeable economic stimulus to an economy already undergoing rapid expansion.

The Johnson and Nixon administrations failed to raise taxes by nearly enough to pay for all of these ambitious undertakings. The government was forced to issue increasingly large amounts of debt, which in turn crowded out private investment, or, at the very least, raised the rates at which the private sector could borrow. Compounding the issues of over stimulus and the growth in government debt were energy price shocks (in which the price of crude oil quadrupled all at once) and social/demographic changes already underway.

The baby-boom generation entered the workforce in large numbers for the first time in the 1970s, many of whom held college degrees and demanded high wages. Also, many women entered the workforce , creating a dual-income household. A dual-income household was willing to pay ever greater sums of money for the right home in the right school district.

Also, entering better-paying positions for the first time were members of communities that had been underrepresented in an earlier era. All of these economic, demographic, social, and public policy forces resulted in an environment where the demand for goods and services grew much faster than the supply.

Consequently, these factors lead, in part, to the upward pressure on…



Mark Justin

Interest in FinTech, Deep Tech, Social Psychology, Neuroscience & Neuropsychology, Health and Longivity, and Global Polictics.