AN OVERVIEW OF FINANCIAL CRISES IN U.S.

Abstract

In this article, most severe U.S. recessions from the Great depression to Dot–com bubble were revealed and analyzed. The most grounded explanation for these economic downturns comes from Austrian business cycle theory. Firstly, U.S. Federal Reserve Board intervenes to the financial market and cuts interest rates to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money through the money creation process in a fractional reserve banking system. This artificial process leads to an unsustainable monetary boom and it results in widespread malinvestments. Later, when inflation accelerates and it causes a burst of financial and real estate bubbles, Federal Reserve Board increases interest rates. A credit crunch or recession occurs when credit creation cannot be sustained. A history and main causes of financial crises show that financial booms and severe busts can be avoided if the lessons from the history would be learned and, most-likely, U.S. and other industrialized countries would return to the gold standard and let free market do its job.