If deflationary type pressures continue (Housing dropping 30%), we'll be begging for some inflation to counter it.
Why? No one complains things are too cheap; computing gets cheaper every year. Are you against affordable housing?
The problem is when the people selling owe more than the market will allow. If I owe $400K on a house and can only sell it for $200K, either I don't sell or I hand the bank the keys and walk away. Then the bank gets stuck with a house it can't sell and no mortgate interest income. If that happens enough the bank goes under, its investors go under, and the effect ripples throughout the economy. A Depression can come EITHER from consumers not having enough money to buy goods OR from lenders not having capital to lend. What we have right now is a capital-crisis, with lenders having no cash to lend or being afraid to lend it. Deflation compounds that problem.
I suspect the oil producers did it on purpose to kill the developing competition from acceptable bio-fuels.
That's just silly. Even assuming OPEC was capable of that level of collusion, you don't throw away 90% of your profit to crush a marginal competitor that will just spring up again as soon as prices go up.
That happens when someone thinks he can throttle a competitor, buy rights to his product in the bankrupcy proceeding, and then either bury the idea or incorporate it into his own and charge what he likes. Think, "Bill Gates/Internet Explorer". IE was (and still is, according to some) a joke compared to Netscape or Mosaic. Gates gave it away for free with Windows and within a few years the others were out of business, even though they had (at the time at least) superior products.
To do this with energy someone would have to have such control of the market to be able to drive prices up and down at will and no one really does. Most of the oil shock last year was actually speculation that it was going to be even more expensive in the future - and many of those speculators lost their shirts. This is another reason for the worldwide economic downturn, btw, although a smaller one.
And why aren't we worried about oil deflation? It is down 70%.
The answer, of course, is that most people own houses but consume oil. If most people owned oil and rented housing, the reaction would be opposite. Of course, there is a significant minority who don't own housing and they benefit from falling prices.
Housing prices were driven artificially high because lenders adopted loose lending standards. This easy money encouraged speculation. Once the bubble burst the lenders were left holding the bag. These "toxic loans" are what's causing the liquidity crisis and until they're disposed of the housing market and by extension construction and all mortgage-dependent businesses are stuck on hold.