- during the booming periods there was overproduction
- after that the aggregate demand fell
producers had to cut the production and lower the prices
- people started to buy more
- therefore firms were encouraged to expand.
It seems to be nice and simple, so many people surprisingly believe that the global recession will correct itself without governments' support. For example opinion from Forbes' columnist John Tamny who says "get out of the way for the economy to fix itself". He is talking about American economy and his point is "that rather than relying on Washington to fix what ails us, the tried and true answer to our economic pain is to let markets clear in terms of people, machinery and property. Only then will assets reach their proper values, after which the economy will start growing again". In addition to that it is important to remember that the governments' support of banking institutions may only delay the downturn and possibly worsen it because the assets will still be overvalued,the money will still be easy to borrow,people will continue to spend what eventually will lead us to the point when people just won't have money at all while the productive capacity will be enormous.
What will happen afterwards?
"Owners of the capital will stimulate working and middle classes to buy more and more expensive goods,machines and apartments. That will also encourage people to take more and more expensive credits,until these credits will become unpayable.Unpayable credits will lead to bankruptcy of banks,which will be nationalised by the government and therefore will lead to formation of the communist society." K. Marx 1867.
Or
We will just move towards governments' supervision of the bank system and become similar to China's economy which is the only country which is likely to show 7% economic growth in 2009(from Newsweek 19th/jan/2009).
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