Since most people at that point would declare bankruptcy, if house prices dropped by enough to make it really worth their while to do that, banks would be screwed (since they have at most 2% reserve).
If banks are screwed, companies and countries can no longer roll over debt (for example in the US that would mean the Federal government would have to raise tax to 100%, and even then it would take a year before they could spend a single dollar again). The US state would be bankrupt in less than a month if interest rates rose to about 5%. Europe would be bankrupt in less than a month if interest rates rose to less than 2% (because they'd have to replace cheap loans with expensive ones they can't pay. The alternative is to pay back the money, but you know, if you can't pay 1% of the money, it seems unlikely that you can pay 100%).
Most companies also roll over debt. Most companies are not like Google and Facebook. So if this happened, and they could not roll over debt, companies like Exxon Mobil, GM, ... would simply be bankrupt. Since most people who have jobs have jobs at companies like these ...
Why do they do it this way ? It's the modern way of printing money. They switched to it because giving the state direct control of the money printers has always led to collapse. At the end of the 19th century, it was leading to constant collapses of currencies, sometimes 5 years or less apart. These collapses came with revolutions, wars, ... very ugly. So now we have the loan system.
Now I guess we see who's smarter : the US/Europe who "loan" money, or China who prints whenever they feel like. There's a few other tiny banking systems that feel they should get a second chance (seems even more lunatic than the China way to me though). History has not yet shown how the Western system can fail, but it has shown time and again that the system China is currently using blows up. "This time it's different", well let me give the standard answer every economist gives : "that could very well be true <chuckle>".
Money only works as long as it's mostly not spent, but in can rotate through the system indefinitely. So as long as the circle "banks -> companies -> people -> houses -> banks" works, with the central bank controlling how much money banks have to keep inflation stable ... Parliaments and dictators have shown themselves incapable of this. But of course, the western system is effectively a system that is an unknown. Every system fails at some point, we may very well be at the point where the western loan system fails.
But I don't think so. History would seem to indicate China has some room to grow, but will collapse into chaos before a few decades pass. The western system will probably carry on until it doesn't. But that could be millenia away as far as we know.
If banks are screwed, companies and countries can no longer roll over debt (for example in the US that would mean the Federal government would have to raise tax to 100%, and even then it would take a year before they could spend a single dollar again). The US state would be bankrupt in less than a month if interest rates rose to about 5%. Europe would be bankrupt in less than a month if interest rates rose to less than 2% (because they'd have to replace cheap loans with expensive ones they can't pay. The alternative is to pay back the money, but you know, if you can't pay 1% of the money, it seems unlikely that you can pay 100%).
Most companies also roll over debt. Most companies are not like Google and Facebook. So if this happened, and they could not roll over debt, companies like Exxon Mobil, GM, ... would simply be bankrupt. Since most people who have jobs have jobs at companies like these ...
Why do they do it this way ? It's the modern way of printing money. They switched to it because giving the state direct control of the money printers has always led to collapse. At the end of the 19th century, it was leading to constant collapses of currencies, sometimes 5 years or less apart. These collapses came with revolutions, wars, ... very ugly. So now we have the loan system.
Now I guess we see who's smarter : the US/Europe who "loan" money, or China who prints whenever they feel like. There's a few other tiny banking systems that feel they should get a second chance (seems even more lunatic than the China way to me though). History has not yet shown how the Western system can fail, but it has shown time and again that the system China is currently using blows up. "This time it's different", well let me give the standard answer every economist gives : "that could very well be true <chuckle>".
Money only works as long as it's mostly not spent, but in can rotate through the system indefinitely. So as long as the circle "banks -> companies -> people -> houses -> banks" works, with the central bank controlling how much money banks have to keep inflation stable ... Parliaments and dictators have shown themselves incapable of this. But of course, the western system is effectively a system that is an unknown. Every system fails at some point, we may very well be at the point where the western loan system fails.
But I don't think so. History would seem to indicate China has some room to grow, but will collapse into chaos before a few decades pass. The western system will probably carry on until it doesn't. But that could be millenia away as far as we know.