GOVERNMENT-INDUCED MARKET FAILURE - A NOTE ON THE ORIGINS OF FHA MORTGAGE INSURANCE

The conventional wisdom regarding the creation of federal housing prog rams during the Great Depression cites market failure as the key facto r leading to government action. A review of the historical record rega rding one program in particular, the Federal Housing Administration's insurance of real-estate mortgages, suggests a more complex picture. A mortized loans were not created anew by the FHA but had been developed previously by various financial institutions; their use by national b anks was restricted by law. What market failure occurred seems to have been induced, at least in part, by the federal government.