Well, like the Great Depression it will be debated for years to come and will still come down to theories. Well here is my theory.
I believe that the cause to this terrible economic world disaster is simply RISK. If you look at the following chart of the Dow Industrials from 1928 to 2009 you will recognize the last 30 years seems to be an anomaly.
Dow Industrial Average from 1928 to 2009
When an index like the Dow Industrials grows to levels like it has over the past thirty years fundamentals can only explain so much. Money is what makes a market climb like it has over the past 3 decades. Simply the more people investing in stock makes the market grow. So basically a generation decided that they were going to accept more risk than their parents did. Their parents had kept the market at bay, since they did live through the Great Depression and understand what can happen when you accept too much risk.
If you look at the last generation who lived through the Great Depression their retirement from the workforce coincidently coincides with the beginning of this current run up in the market. In the early 1980’s the USA had a savings rate of nearly 10%, in 2006 we were at a negative savings rate (spending more than we made). Over the past 30 years we have accepted more and more risk into our lives and now are dealing with the rebalancing in my opinion. We tend to forget if we do not have someone continuously reminding us.
