By David Howden
The concerted effort by the world´s central banks to expand their money supplies to combat the crisis is not without its own rationale. In the aftermath of the Great Depression of the 1930s, economists diagnosed the key problem as an inability for prices to adjust quickly enough to “clear the market.”
Consider the market for houses. At the peak of the boom there may be 100 people buying homes, with an average price of $250,000. Total housing expenditure is $25 million. Then the bust sets in. For some unexplained reason some people lose their nerve. Now only 80 people want to buy a home, or perhaps the average price they are willing to pay declines by 20%. In any case, the total housing expenditure is going to decrease to only $20 million.
Continue reading...
The concerted effort by the world´s central banks to expand their money supplies to combat the crisis is not without its own rationale. In the aftermath of the Great Depression of the 1930s, economists diagnosed the key problem as an inability for prices to adjust quickly enough to “clear the market.”
Consider the market for houses. At the peak of the boom there may be 100 people buying homes, with an average price of $250,000. Total housing expenditure is $25 million. Then the bust sets in. For some unexplained reason some people lose their nerve. Now only 80 people want to buy a home, or perhaps the average price they are willing to pay declines by 20%. In any case, the total housing expenditure is going to decrease to only $20 million.
Continue reading...
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