Firstly “academic studies show that changes in home prices have nearly double the impact on consumer spending than does the ‘wealth effect’ from rising or falling stock prices.”[xiv] This would trigger a further slowdown in the economy. Secondly as pointed out by Herring and Wachter “real estate booms often end in banking busts”[xv] Banks which have large holdings of non-performing real estate loans, as a result of a crash in the real estate market, “will be unable to generate sufficient retained earning to restore their capital in a timely manner. Instead they will shed assets, scaling back new lending to all sectors of the economy and declining to roll over outstanding loans when they mature.”[xvi] At that stage the US economy would be at step two of Fisher’s theory, contraction of deposit currency, caused by a decrease in loans.

The US Federal Reserve does identify the threat and potential dangers of deflation, however it remains confident that it is ready and able to fight off a possible deflation and Federal Reserve officials maintain that the chance of a long-term deflation is very small. The Federal Reserve is committed to stopping deflation and as Allan Greenspan stated, “If deflation were to develop, options for an aggressive monetary policy response are available”[xvii] These options include further driving down short term interest rates to a minimum level of zero, purchasing long term treasury bonds with the purpose of injecting money into the economy and lowering long term interest rates. Federal Reserve officials have even mentioned such drastic measures as enforcing a ceiling on long term interest rates effectively reducing the cost of mortgages, this would provide short term relief to the housing bubble, however it will also act to make it more resilient allowing it to blow up even further, making a potential crash even more disastrous. Another option that has been mentioned by the Federal Reserve is flooding the economy with currency by printing money. “The fact is, though, that real deflation is so rare that central bankers have little experience fighting it. No one really knows whether a central bank's anti-deflation policies would work.”[xviii]

 

Well so much for dumb theories by central bankers... I have said this repeatedly what did the central ever really do, foster more credit on the public, so we this allusion of prosperity... now that is all reversing and who is going to pay the price?  Well of course the middle class while some bozo on Wall Street walks away with over 100 million dollars for almost brining down the global banking system.

 

 

 

 

Joseph