It is five years since the Great Re-cession began in the fourth quarter of 2007. Measured in Depression Clock Time, it is 1934, when the U.S. economy expanded 7.7 percent. Today no such expansion is on the horizon. Rather, the economy is still mired in a low-growth rut, only the second such severe downturn since 1929. We are in a balance sheet crisis, the consequence of a collapse of asset (read “housing”) values against fixed debt obligations plunging many households now 22%—into negative equity. These households owe more on their mortgages than their houses are worth, with even more households near the edge of that black hole. More serious for the economy is that the banks holding these mortgages are simultaneously plunged into negative equity. Total U.S. home equity, which rose from $6 trillion in 1997 to a peak of $13.5 trillion in 2006, returned to $6 trillion by 2009, where it remains stuck.

To read Dr. Vernon Smith’s full article please read the most recent addition of the IFREE Newsletter.