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Balance Sheet Crises

Causes and Consequences

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  • Balance Sheet Crises - Dr. Vernon L. Smith

Major long-lasting economic slumps such as the Depression and Great Recession, and 11 other less severe and relatively short recessions since World War II, have been regularly foreshadowed by declines associated with housing-mortgage market behavior. The most recent calamity is a consequence of the housing bubble and collapse, 1997-2012. Bubbles are commonplace in history, but severe episodes in the U.S. economy are rare and their collapse not anticipated by economic and policy experts. As in the recent case, collapses can lead to a balance sheet crisis in which households spiral into negative net equity as home values fall against fixed mortgage indebtedness, and these conditions--not part of standard economic analysis- -are mirrored in households’ lender banks. Various recovery scenarios can be identified, none of them painless.

Dr. Vernon L. Smith holds joint appointments with the Argyros School of Business and Economics and the School of Law at Chapman University where he is also a scholar in Chapman’s new Economic Science Institute. Smith was awarded the 2002 Nobel Prize in economic sciences for his groundbreaking work in experimental economics and is a member of the National Academy of Sciences.

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