Economic Collapse 2007–2008: Would 1929 Be Reborn in Anemic Growth?

  • Vernon L. SmithEmail author


Our move to Chapman coincided with the start of the Great Recession. In the run-up, we had experienced a debt-financed housing expansion not seen since the 1920s, but much larger and potentially more damaging than the Depression. While the Federal Reserve intervened massively and cushioned the decline, it erred badly in rescuing investors from the consequences of their own decisions. The widely expressed outrage over banking-government cronyism failed to recognize that it assured that incumbent investors would survive to share the return on new growth with new investors. The effect always is, and was, to dilute that growth, assuring in this outsized case our long, painful growth recession exacerbated by too late, and excessive bank lending restrictions. Policy in the Depression had inverted this error by failing to act even to protect depositors. That collapse was deep, although the wave of bankruptcies cleared the decks for a resumption of growth, albeit from a deep hole. By late 2007, new housing expenditures had declined for seven straight quarters, noticed by the Federal Reserve, but badly mis-diagnosed in failing to see that it was evidence of an insolvency crisis not a liquidity crisis.

Copyright information

© The Author(s) 2018

Authors and Affiliations

  1. 1.Economic Science InstituteChapman UniversityOrangeUSA

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