It's not all psychological, the problem is that massive amounts of capital have allocated to the wrong uses - building 100 homes, when only 50 were needed or bu

It's not all psychological, the problem is that massive amounts of capital have allocated to the wrong uses - building 100 homes, when only 50 were needed or building a factory that produces 10,000 items when only 5,000 are needed. Unfortunately do to all the interference in the market no one is sure what the correct prices are and hence what the actual demand is and what is and isn't profitable. Adding to this all the messiness of new insurance laws, etc it becomes very hard to predict what the next correct move will be so instead people save their cash until they know what to do. The way we find out what is real is by seeing what people will buy at what price and letting everyone go bankrupt who can't pay their bills. This will depress the costs of goods until demand picks up. For instance, everyone thinks their house is worth probably 30 - 40% than it is. So they refuse to sell at lower prices, keeping inventory off the market. Thus no one is buying houses since the asking price is too high. Housing is tough one because it takes forever for the prices to adjust back to normal, but everywhere this type of effect can be seen.