On 7 Jun 2009, at 01:33, bruce majors wrote: > Economist: Housing bubble caused Great Depression, too > JOHN STARK - THE BELLINGHAM HERALD > > He argued that stock market crashes in themselves are not enough to > drag the > > whole economy under: The collapse of the dot.com stock bubble of the > 1990s, > painful though it was, did not lead to wider economic collapse.
Whilst I think I generally agree with his thesis and prognosis this bit is interesting because it was *because* of the collapse of the late 90s dot.com bubble that monetary authorities on both sides of the Atlantic dramatically loosened money supply in order precisely to prevent the burst turning into a rout which gave rise to the property price bubble in turn. You can see it in the charts. Stocks and houses were rising nicely alongside M4 lending until late 2000/early 2001 when stock fell off a small cliff whilst M4 lending began to increase much faster than previously tracked by house prices - there was a clear divergence in the two asset classes. So, it would be interesting to know whether there was a similar threat in the early twenties that was diverted by loosening money that fueled a similar housing boom. Or, perhaps of more interest to us, could it have been the first peace-time "fruits" of the Federal Reserve system feeding money inflation which got ploughed into housing? 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