The Crash of 1929 did NOT cause the Depression

What caused the depression was a credit crunch followed by major debt deflation.

Hmmm. Tightening credit. Soaring levels of debt, backed by declining assets. Sounds familiar.

Hyman Minsky:

This is that a pure market economy is characterised by a fundamental asymmetry which can cause the debt to output ratio to rise over time, to levels which can be unsustainable. This asymmetry is easily put: firms incur debt to finance investment during booms, but have to repay that debt during slumps. Since the cyclical path of a capitalist economy is itself asymmetrical, this results in the level of debt ``ratcheting up'' during a sequence of trade cycles. Under fairly general conditions, this process can reach a point at which the accumulated debt overwhelms the debt-financing capacity of the economy, thus leading to a Depression.

Luckily, government spending is at a level that helps smooth out any adverse cycles (I'm always perplexed how the right-wingers never see this fact), but we could be in the midst of something big in the real estate market. A lot of people will lose money, but the banks will rush to sell their foreclosed properties to get whatever they can to keep cash flowing. This will flood the market, increasing the cycle. Credit will tighten, forcing banks to sell more properties, ad infinitum. Some banks will fail. The government will step in to bail them out. We will all pay.

The fed will drop interest rates to ensure the banks stay as healthy as possible, and make new mortgages available for all the homes being sold at a loss. Interest could continue to drop to fight the deflationary forces and may eventually end up in a classic Keynsian "liquidity trap".

In my mind, the problem with government spending now vs. Depression-era spending goes once again to Keynes: the government money is going to huge companies, widening the income gap, and generally flowing to people with very low marginal propensities to consume.

On the bright side, our open markets tend to correct harshly and quickly, and are the most resilient in the world. The world can not afford to let us fail, but they can stop sending their money here in the future.