The Fed

Artificial credit created by a deceptively low rate of interest leads to speculative bubbles.

Remove all government impediments to effective entrepreneurial planning: avoid protectionist measures internationally; allow prices and wages to adjust as needed to restore market equilibrium. Not only cut tax rates, as was done in the incomplete reforms of the 1980s and early in this century, but, per Rothbard, drastically reduce the government budget, both taxes and expenditures.

Krugman. 2002. Calling for a housing bubble.

True prosperity did not return until "the federal government relinquished its stranglehold on the American economy."

Suppose in 2007 you were handed a piece of paper and a pencil, and were asked, "Come up with a list of bullet points for how to generate severe stagflation in the years 2010 through 2019."

Wouldn't your list look pretty similar to what has already happened?

Bubble activities are not self-funded; they require money "out of thin air," which is employed to divert real savings to them from wealth generators.

"In a year or two, we just moved right from that stock-market bubble, almost seamlessly, into the real-estate bubble, and nobody could see that there was any similarities."

"There is no incentive for bank depositors to go to the trouble of determining a bank's soundness if the government is going to guarantee deposits."

In addition to his merciless evisceration of the propaganda surrounding specific New Deal programs, Murphy assembles some suggestive evidence, in addition to the clear testimony of economic theory, regarding the destructive, growth-inhibiting nature of the New Deal in general.

Government interventions are at the root of the problem as they disrupt the incentive structure that bankers face, limiting their propensity to abide by this sensible practice. The explicit guarantee by the Central Bank of Iceland altered bankers' risk preferences, and resulted in the risky undertaking being gingerly assumed to be sustainable.