Compare, for instance, the IT bubble at the beginning of the 2000s with the current crisis, where a bubble in the US housing market played a key role. Although the IT bubble resulted in heavy stock market falls and hit many investors hard, the crash did not have major effects on the real economy, which stands in sharp contrast to the effects of today’s crisis. The same applies in a comparison with the Swedish financial crisis at the beginning of the 1990s. A decisive difference between a stock market bubble and a property market bubble is that the latter is almost always linked to an untenable credit boom. When house prices rise, the value  2  BIS Review 70/2010  of the underlying assets increases, which gives scope to borrow even more with this asset as collateral. At the same time, increased lending provides more purchasing power, and this contributes to prices rising even more. It becomes a self-reinforcing spiral that can be very powerful – both in the upward phase and the downward phase. When the upward spiral is broken, there is a turnaround and a rapid downward spiral, which is probably much quicker than the upturn. Prices fall, the mood becomes increasingly negative and lenders and borrowers become increasingly unwilling to take on risk. The banks’ loan losses increase. The result may be a long period when households and companies hold onto their money more firmly to reinforce and balance their finances. Consumption and investment are weak and lending is restricted.
Christine Lagarde: IMFC Statement Speech by Ms Christine Lagarde, President of the European Central Bank, at the forty-fourth meeting of the International Monetary and Financial Committee (IMFC), IMF Annual Meetings, 14 October 2021. * * * Global economic activity has continued to recover since our previous meeting in April this year, thanks to further progress in vaccination campaigns and supportive economic policies. However, the pace of the recovery remains uneven across sectors and countries, and the spread of the more contagious Delta variant of the coronavirus (COVID-19), coupled with supply bottlenecks, is casting a shadow over the near-term growth prospects for the global economy. The main challenge for policymakers continues to be steering the economy safely out of the crisis. It remains crucial that policy support is not withdrawn prematurely. On the fiscal side, support measures should be increasingly targeted. And on the monetary side, clear communication by major central banks is essential, also in view of the recent inflation developments. The policy mix should be accompanied by well-tailored structural reforms to enhance long-term growth and minimise scarring effects from the pandemic, along with action to accelerate the green and digital transitions. Euro area developments and outlook The rebound phase of the euro area economy is increasingly advanced, despite supply bottlenecks and continuing uncertainty about the pandemic.