This excerpt originally appeared in City A.M. on April 23, 2012.

The economist Israel Kirzner has long used traffic lights as an analogy for prices. In the case of the boom and bust, the key price was the interest rate. In a free market, interest rates and the banking system coordinate the plans of the cross-traffic of lender-savers and borrower-spenders. If saving increases, it means consumers are more willing to wait for goods. Their saving leads banks to offer lower interest rates, providing a traffic signal (and an incentive) for borrowers to borrow for longer-term projects that match the greater patience of consumers. If consumers are more impatient and save less, banks raise rates, leading borrowers to go more short term to match this preference. Each side’s behaviour is consistent with the other’s, thanks to the traffic-signal role of the interest rate.