How to Avoid Another Depression

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"Great Depression" is a strong term, but what exactly does it mean? Depressions are a normal part of a business cycle that are now often called recessions, downturns, or corrections. They occur in any economy where the financial markets are based on fractional-reserve banking.

Depressions only become "great" when normal to severe depressions are used as excuses for massive increases in government intervention. Murray Rothbard’s America’s Great Depression clearly demonstrates this phenomenon. The three great depressions in the history of the United States are the Progressive Era (1907—1922), the Great Depression (1929—1945), and the Great Stagflation (1970—1982).

The year 2008 marks the beginning of the next recession, correction, or depression. All the statistical indicators are pointing in that direction. All market indicators point in that direction as well. Ask any noneconomist and you will get that same answer. We only have to wait for the folks at the National Bureau of Economic Research to officially confirm what we already know.

The reason for the depression is the bust in the housing market — we all know that too. Austrians reported on the housing bubble throughout the boom. Beginning in early 2003, Frank Shostak, Christopher Meyer, Lew Rockwell, Robert Blumen, Jeff Scot, and others, including this author, were writing and lecturing about the housing bubble. We identified the cause of the bubble as the Federal Reserve and its inevitable consequences of a bust in the housing market and the overall economy.

Homebuilder stocks peaked in mid-2005 and it’s been like watching a train wreck in slow motion ever since. When the overall stock market peaked one year ago we could finally celebrate the beginning of the correction phase of the business cycle even though most of us suspected it would be a severe one. Several mortgage dealers went bankrupt in 2007 and the increased number of foreclosures signaled that the correction was finally under way.

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Mark Thornton [send him mail] is an economist who lives in Auburn, Alabama. He is author of The Economics of Prohibition, is a senior fellow with the Ludwig von Mises Institute, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War and is the editor of The Quotable Mises.

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