Reply To: What is the catalyst for the bust?


The monetary inflation and credit expansion of the 1920s occurred in three intense episodes in 1922, 1924, and 1927. The resulting asset price inflation, especially the rising stock market, led the Fed to tighten monetary policy in 1929. A few months later, interest rates started to rise. Savvy investors recognized this as the top and sold out of stocks. As they did so, stock prices softened and less savvy investors sold out and so on. So in some cases, the Fed tightens monetary policy to “fight Inflation” and this heralds the financial crisis.

Take a look at Benjamin Anderson on the Great Depression:

In other cases, like the financial crisis of 2007, the Fed continues expansionary policy even in the face of asset price inflation. Savvy investors still sold out of real estate investments because they recognized the increasing riskiness of further investment in the lines of the boom. As a result housing prices softened, leading less savvy investors to sell out and so on.

Take a look at Lucas Engelhardt on the downturn of 2007: