The fact bad loans, unpaid loans and overlent money comes to an emergency brake, wouldn't that mean a sudden stop in inflation money supply?
This many not mean higher interest rates, but certainly shrinks the amount of money (and housing loans are far more than any other loans) on the market. (At the same time wake many up to the money crisis)
Wouldn't that be a deflation, thus a good thing?
Or, at the least, teach many where to put money, let supply/demand balance out some short run circulation?
Indeed, long term damages can't ever be fixed easily. But can this panic be a good thing for short term awareness and economic stability? (Yes, I just said it, stability, it's instability that caused it)
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Defaults do have a deflationary effect by reducing the velocity of money, but
no money is actually destroyed. With the fractional reserve banking system,
the banks are free to immediately make more loans, so the money apparently
lost appears elsewhere in the economy, if those loans are taken out.
Debt instruments are not money; they expire. Then they become demand notes,
like checks. Whether or not there is a default in their payment, no money is
created or destroyed by them. A debt instrument has no value whatever without
a due date.
The dismal business outlook that accompanies times of mass loan default does
tend to stifle new ventures and business activity in general. A lower velocity of
money slows the self reinforcing effects of inflation, reducing the speed with which
newly printed money affects price levels throughout the economy.
If the Fed Res is free to make loans whenever (and they are, but do they want to), shouldn't they continue to pump money in and give bad loans, so we wouldn't have a housing bubble, and instead have runaway inflation?