Why do economies crash, then stake so long to prosper again? Whats the solution? Who's at fault?
I Favor the Austrian View:
1. The Central Bank lowers Interest rates to spur lending (of subsidizes sectors as they did before 1913)
2. More loans are lent out to people who meet the new lower criteria and could not afford them if the market priced interest rates; misallocating resources to where society does not value them at the newly artificial price
3. Government's incentivize Commercial lending risk by acting as a cosigner (the Fed's 1924-1928 low interest rate & inflation policy giving investment banks more money to 'Marginally Invest' with low risk; Fannie Mae, Freddie Mac on homes in 2008; now Sallie Mae Student Loans)
4. Low Interest Rates give people who would have saved no incentive to do so, loosing value against inflation
5. They seek places where money is acquiring interest rapidly (Railroads (no CB, but government subsidy) in 1878, Stocks in 1929, Homes in 2008)
6. The sector becomes highly overvalued
7. Investors realize overvaluation, now that money is in the hands of consumers and they don't value the inflated sectors at their current prices; and Sell in Large quantities in a short time = Crash
8. Governments intervene with new taxes and expenditures misallocating new resources; not allowing society to spend on things they would have purchased voluntarily or saved. Sectors that crashed are subsidized and not allowed to fail when they are not stable and mismanaged. The crash prolongs into recession**
**Hoover- Enacted Smoot Hawley Tariff (5 countries ceased shipments to US as result); bailed out companies with the Reconstruction Finance Corporation & Home Loan Bank; increased Federal spending 48% from 3.1 Billion in 1929 to 4.6 billion in 1932; Price & Wage controls- Federal Farm Board subsadies, Davis Bacon Act, Norris-LaGuardia Act; decreased immigration by to 15% of Coolidge; Public Works Administration; raised taxes in Revenue Act of 1932 bringing top rate from 25%-63%; 1933 Unemployment rate- 25%
FDR- New Deal Parts one and two (1933-1937) caused artificial boom within depression and the 1937 recession when overvaluations & misallocated resources were recognized; and in 1939 had Unemployment Rate at 19% even after many were taken out of the labor market by not being counted; and raised corporate taxes and top rate to 98%
Bush- Bailed out top 10 banks at $800 billion price tag
Obama- Bailed out GM loosing tax payers 11.2 billion dollars, raised Social Security Taxes on all Americans from 4.2% to 6.2%, enacted $787 billion stimulus
Whereas the Recession of 1920 as a result of the Feds 1916-1918 policy under noninterventionist Warren Harding lasted 18 months. The shortest recession on record occurred under a POTUS that refused to increase taxes and expenditure.
Governments take money by force and don't allow society to purchase what is actually valued; highly increasing value in one sector and away from what the market actually values. The moral hazard they create gives banks the go ahead, and the history of bailouts and assistance reassures them; no other organization takes such risks with their own capital because they have a Monopoly Central Banking system (Federal Reserve) who will prop them up.
The same Stock market bubble is here today as a result of low interest rates, QE inflationary spending, and Sallie Mae Student Loan bubble.