The Corner

From Bubble to Depression?

Over at the Wall Street Journal, Steven Gjerstad and Vernon L. Smith ask “[…] what sparks bubbles? Why does one large asset bubble — like our dot-com bubble — do no damage to the financial system while another one leads to its collapse?”

The two economists give a very interesting explanation of what made this housing bubble different from the other two housing bubbles of the last 40 years (and btw, they have very cool charts to illustrate their point). They explain what the Fed did right and did wrong, should and shouldn’t have done, and, more interestingly, what it could or couldn’t have predicted.

It also sheds an interesting light on Ben Bernanke’s Great Depression scholarship.

For anyone interested in the current housing crisis read the whole thing here.

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