By Vernon L. Smith and Steven Gjerstad
Financial and economic collapses in 2007-2008 and 1929-1930 followed unprecedented residential mortgage credit expansions. Both generated household balance sheet crises that were transmitted to banks as asset prices collapsed against fixed debts. Industry suffered from declining expenditures on housing and durable goods, and income fell when production and employment declined. Irving Fisher (1933) described this spiral in “The debt-deflation theory of great depressions.”
These developments impacted major categories of US expenditures. The chart shows percentage changes in expenditures on consumer non-durables and services (C), GDP, consumer durables (D), non-residential fixed investment (I), and housing (H). The change for each category is computed relative to its level at the start of the recession in Q4 2007.