Yale economist Irving Fisher is usually known for what could be the worst call in financial history. He said that stock prices had reached a permanently high plateau just days before the Wall Street crash of 1929.
But perhaps it is time to brush up one of Fisher’s more prescient observations. He said the ensuing Great Depression was caused by the downward spiral of debt and deflation. Ben Bernanke doffed his hat to Fisher in a speech made in 2002. Bernanke cited the theory of how fire sales of assets push down asset prices and could lead to a drop in aggregate demand and price levels. In short, a full-blown financial crisis could wreck the real economy.
As the credit crisis gets worse and investors dump stocks to create liquidity, it is time to ask whether the US economy is headed for major trouble. The talk is still of a short recession, but Japan’s lost decade in the 1990s shows that a lot worse can happen, as Fisher once predicted.