A Note on the ‘Great Contraction’
2 Pages Posted: 24 Nov 2009
The modern literature on the US banking crisis in 1931 overlooks the key role played by ‘liquidity black holes’ and under-pricing in the corporate and government bond markets resulting from the banking system's fire sale of assets. This process weakened the bank lending channel in a continuous feedback loop which was eventually checked by ‘money creation’ by the Federal Reserve. This note investigates the work of Evans Clark (1933) who highlighted the process of fire sales and mispricing of assets due to non-fundamental causes.
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