These have been a direct result of the Fed policy of lowering of the interest rates below their natural free market rate during market downturns. Austrian business cycle theory explains this predictable boom bust cycle:

1 The Fed lowers interest rates below what they would be on a free market.

2 Businesses borrow money for long term projects that previously hadnt seemedprofitable.3 People and money flow into the sectors most influenced by the apparent boom

.

4 The Fed begins a process of incrementally increasing interest rates at regular intervals.

5 Prices rise, often ending in a mania phase (examples: dot-com bubble, housing bubble)

6 A realization occurs that there is not sufficient actual savings to make all the projects profitable in those sectors affected by the boom. The bust occursas the market tries to reallocate resources to industries that better reflect true supply and demand.

Prices fall. Unemployment rises. The Fed repeats the cycle.

1 The Fed again lowers interest rates below what they would be on a free market.

2 As before when rates were lowered below the free market rate, long-term business projects are evaluated based on the artificially low rates.

3 Resources and workers are encouraged to remain in the unprofitable post boom industries. Money losing businesses that should fail are kept alive. Servicinglarge debt loads becomes widespread, again made possible by the Fed's artificially low interest rates..

The cycle repeats in progressive cycles with each bust getting progressively worse. Debt loads constantly increase and the malinvestments, never having a chanceto liquidate, continuously drag on the economy more and more until we reach thedreaded point of no return.

At some point the low interest rate policy of the Federal Reserve fails to kickstart the boom bust cycle. The debt burden is just too large to overcome. We areat this point now.

The Fed furiously lowered rates after the nasdaq dot com crash. Instead of a much needed recession to realign resources with profitable investments, the Fed prevented the recession from liquidating the malinvestments. The artificially low rates instead ignited the housing bubble and its related derivative securitization bubbles.

Predictably the Fed again lowered rates. This time it has taken them all the wayto zero. The difference now is that this time it is not working. The Fed cannotignite another bubble. The burden of the massive debt overhang is too much to overcome. There will be massive defaults at all levels of society including individuals, corporations, municipalities, states and finally the Federal governmentitself. They all have too much debt to pay back and it will be defaulted on.

 

There are two ways they can default.

They can default by not paying the loans back and we get a viscious but not endless period of deflationary debt collapse where all the bad decisions of the pastFed induced business cycles are finally accounted for.

Alternatively, the U.S. Government can bail out everyone by borrowing tens of trillions more and turn to the Federal Reserve to magically print up the necessarydollars to finance it all. This would eviscerate the dollar on the foreign exchange market and send prices soaring to the moon in a hyperinflationary depression.

There is no solution to the crisis, merely a choice of which of two roads to choose, a deflationary debt collapse, or a hyperinflationary dollar collapse. Pickyour poison thanks to our masters at the Federal Reserve.

One thing is certain, when the dust clears we need to point our fingers at the Fed as the real culprits enabling a welfare, warfare state where the majority ofthe populace is on the dole. Free market capitalism will allow us to return to prosperity after the crash if we let it.

We need to listen to those who saw what was happening and warned about it. Thereare free market economists who understand the need for a sound commodity basedmoney and can help ensure the special interest groups never again take control of our economy and our country.

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The years leading up to the 2008 Financial Crisis saw similar trends as those before the Great Depression. It was also a period of extreme inequality and excessive risk taking. Credit-binging had inflated bubbles in housing and stocks clearing the way for a painful downturn and years of retrenching. The economy was also weak before the crisis, but the weakness was largely masked by the frenzy of credit spending that kept activity high. On August 9, 2007, the mask was strippedaway when French-owned bank BNP Paribas suspended withdrawals at three of its funds because the value of the toxic mortgage-backed assets it held could not bedetermined. News of the incident spread quickly through the markets where trillions of dollars of mortgage-backed securities (MBS) were held by all the major banks and financial institutions. That set off a cascade of downgrades which ate away at bank capital and led to the collapse of Lehman Brothers.

When Lehman failed, all Hell broke lose; markets plunged, interbank lending slowed to a crawl, and forced liquidations wiped out trillions in capital. The unwinding continued for a full 6 months despite Congress's $700 billion TARP bailoutand the Fed's blanket guarantees on all manner of dodgy financial assets. Finally, in mid-March 2009, the stock market hit rock-bottom and slowly began to recover. In contrast, the real economy remains stuck in a long-term Depression characterized by flagging output, falling housing prices, and high unemployment.

The basic problem facing the economy, is lack of demand. Stagnant wages, high unemployment and gross inequality have made a strong recovery impossible. Workingpeople simply don't have the purchasing power to generate positive growth. If itwasn't for monetary and fiscal stimulus, the economy would be in recession right now. Even so, personal consumption has not slipped as much as one would expect. What has dropped off is investment, and, as author Robert Skidelsky notes, "Ina growing economy, the gap between consumption and production must be filled byinvestment if full employment is to be maintained."

Unless investment picks up, the economy will continue to operate below capacity

 

and unemployment will remain high.

So, why aren't businesses investing?

Because working people are underwater on their mortgages, maxed out on their credit cards, and overdue on their bills. There's no reason to build more capacitywhen consumers are struggling just to stay afloat. But that creates a big problem for the economy, because new investment is crucial to keeping things running smoothly. Here's how John Bellamy Foster and Fred Magdoff explain it in their book "The Great Financial Crisis":

"For a capitalist economy to work well the surplus (or savings) that it generates must be invested in new productive capacity. Yet, investment in modern capitalism...is at best a risky undertaking since investment decisions that determine the level of output in the present are based on expectations of profits on this investment...in the future.....Any lessening of investment tends to generate a vicious circle, pulling down employment, income, and spending generating growing financial problems, and negatively affecting the business climate generally---resulting in an economic slowdown." ("The Great Financial Crisis", John Bellamy Foster and Fred Magdoff, Monthly Review Press)

The recycling of surplus capital has hit a road-bump, so the economy has startedto sputter. This situation should persist until household deleveraging ends andconsumers regain their footing.

The Fed has tried to offset the lack of investment by inflating an equities bubble, but, so far, the results have been disappointing. The so called "wealth effect" has not boosted investment or trickled down to the broader economy. Demand remains weak and there are no signs of another credit expansion. Unless there's asurge in borrowing, (which seems unlikely) the financialization process will slow and the economy will languish in a long-term slump. That appears to be what'shappening.