Nothing So Painful As Deleveraging

Paul Krugman has a good article on the current housing market:

There was indeed a bubble, and since it popped two years ago home prices have fallen faster than they did during the Great Depression.

That's actually common knowledge. The additional point is that we are currently in a financial vicious circle:

As the economist Irving Fisher observed way back in 1933, when highly indebted individuals and businesses get into financial trouble, they usually sell assets and use the proceeds to pay down their debt. What Fisher pointed out, however, was that such selloffs are self-defeating when everyone does it: if everyone tries to sell assets at the same time, the resulting plunge in market prices undermines debtors’ financial positions faster than debt can be paid off. So deflation in asset prices can turn into a vicious circle. And one consequence of what he called a “stampede to liquidate” is a severe economic slump.

This, as Krugman points out, was why Japan got stuck in neutral during the 1990's....