The Two “Best” Financial Inventions?

Business Week magazine recently ran the 85 most disruptive inventions in the last 85 years. I was a feature to correspond to their 85th anniversary. Two of them were finance related. One is the best and one…I’m not so sure:

Fixed rate mortgages: You bet that was one of the best and most disruptive inventions. In 1933, the Home Owner’s Loan Corporation introduced the first 15-year fixed home loan in the U.S. It’s now the foundation of the housing market and came as a result of the 1929 stock market crash that sparked massive waves of foreclosures. To create stability, Home Owner’s Loan rolled out a fixed way to fully pay off your mortgage inside of a reasonable period of time. Critics thought it was insane and un-American to put people into debt for 15 years. They were dead wrong, of course. And an entire generation benefited from it where, by the end of the 1950s, 62% of households were able to own their own home. Of course, the terms kept increasing along with housing prices. Then, in a bad detour, all kinds of kinky, borderline legal, exotic, and hard to understand mortgages were rolled out in the mid 2000s. We all know how that blew up. In Canada our detour wasn’t that kinky, it was just 35-year mortgages for a while. Today, it’s back to the standard US 30 year mortgages issued for over 90% of new loans. Or the standard 25-year loans here in Canada.

The second one sure made me think: What do you think is the most effecting single word that managed to automatically double sales of anything? It’s the word “credit,” the other most disruptive invention, according to Business Week. Whatever the product, if you can finance it – sales at least double..and in cases of vehicles – increase tenfold since 90% of them are financed in one way or another. It was something to be avoided at all cost, something embarrassing, shameful, and never talked about back then. It was debt – and that was to avoided at all cost. A little..ok..a lot..of marketing changed the word to credit, and the perception that that was OK to have and…here we are. Broke nation…us, corporations, and governments…One small word which can buy us so much happiness and so many things…but whose consequences can be so ruinous…

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