Economists conventionally attribute the Great Depression to blunders by the then-new Federal Reserve Bank. According to this story, promoted by Milton Friedman and the Chicago School, after the stock market crash of 1929, the Fed kept interest rates too high, strangling the economy. This story made most economists confident that it couldn’t happen again.

But there’s a different story: the story of the great 1920’s real estate bubble. It began with cars.

Starting in 1899, the auto industry took off exponentially, dipped for two years during World War I, then took off exponentially again during the 1920’s. Production reached a peak of over 4 million vehicles in 1929, before collapsing. It did not again pass 4 million until 1949!

The auto suddenly opened up vast suburban and rural areas to housing. Developers—legitimate and bogus—leapt at the opportunity. Banks jumped in too, creating so-called “shoestring mortgages”—effectively allowing property purchases on margin. Within a few years, tens of thousands of acres around major cities had been subdivided and sold. In rural areas, developers bought up farms, dug a pond, built a “club house” and sold cheap “vacation” lots. As reported in Homer Hoyt’s classic One Hundred Years of Land Values in Chicago, from 1918 to 1926 Chicago population increased 35% and land values rose 150%, or about 12% a year.

In 1926, land values stagnated, then fell. After 1929, home construction collapsed, and—paralleling the auto industry—did not again pass the 1926 level until 1950. Around Detroit, over 95% of recorded lots were vacant as of 1938. Nationally, there were an estimated 20 to 30 million vacant lots, compared to about 30 million occupied housing units. According to economic historian Alex Field, the barren subdivisions ringing the cities hindered the recovery of construction: Missing titles of defaulted owners and poor physical layout created de facto brownfields.

The real estate bubble helped set off and then worsen the Depression. Collapsing land values left people suddenly much poorer, so they cut spending. They also defaulted on mortgages, sticking the banks with “toxic” assets: liens on near-worthless property. The struggling banks in turn cut off lending even to good customers. Bank runs—panicky depositors withdrawing cash—further crippled the banking system. Between drops in spending and lending, businesses failed, unemployment soared, and prices fell.

Thus a radical innovation of the early 1900’s—the automobile—set off a destructive real estate bubble in the 1920’s. Another radical innovation took hold in the late 1990’s: “”securitization,” that is, the aggregation of consumer debts, especially mortgages, into marketable packages known as “collateralized debt obligations” or “CDO’s.” CDO’s set off another giant real estate bubble by making houses “affordable” to poorer Americans. The collapse of the CDO bubble stuck banks once again with “toxic” real estate.

Fortunately, economists—and markets—recognize that to limit damage, we must force banks to write down the garbage quickly. But write-downs will reveal that some big banks’ liabilities exceed their assets, requiring drastic remedies, including restructuring, breakup, and possibly temporary nationalization.

The scholars studied the house, uncovering its rich history and many beautiful qualities. At night they would describe their discoveries to the people, who more and more came to admire the house and the scholars. Many days passed. The people now treated the house differently. Now they respected the house. They didn’t dance and sing in it any more. When they entered they remained quiet, waiting in awe for the scholars to speak. Gradually some of the people even stopped using the front door to the house–until everyone used the side door. As the people would enter that side door they would receive a little guidebook explaining the ancient and rare artifacts in the house.

Finally, the front door was completely forgotten. Weeds and bushes grew and hid the door from sight. The vegetation also covered the front windows so that the house became dark, illuminated only by candles.

More time went by. While the scholars continued to enter the house through its side door, holding meetings during which they argued about antiques, the humble people stopped going to the house. The novelty of the discoveries had worn off, and the people were tired of the dark house with its side entrance. They didn’t really understand the scholars’ discussions anyway. The people walked by on the street but no longer even saw the house. Occasionally they would pause as if lost. Something seemed to be missing, but the people didn’t know what. The people no longer remembered the house.

Then one night an old beggar, looking for protection against the cold, pushed his way into the brush and stumbled across the big house and its front door. He entered through a crack. The house was beautiful and it was warm. The next night the beggar came back. Soon, he brought some companions, bagladies and runaways. They began to come every night. The brush was beaten back and light entered the house. The people were happy and began to whisper, “this is our house.” The news spread from mouth-to-mouth.

In the mornings when the scholars would arrive through their side door, they would notice the telltale signs, indicating that the humble people were sneaking in at night. The scholars caucused and some got mad, saying, “the people are going to mess up and profane our house.” But one scholar hid at night in a corner of the front room and saw the people come in without asking permission to dance and sing and play in the house. He liked what he saw. In fact, he was so impressed that he came out of his corner and joined the circle of those who were dancing. Then he discovered what he should have always known: that the purpose of scholarship was to help the people find joy in life. After that, he also started entering the house through the front door, and he saw the house in yet a new way.