Is debt almost always the cause of crashes and recessions?
While debt increases the likelihood and magnitude of a crash, speculation, excess supply and other market factors can result in crashes without requiring excessive debt. A popular counter example of crashes due to speculation is 16th century Dutch Tulip Mania.  The dot com bubble is a more recent example of a speculative crash. There were debt related issues for some companies and the run ups in stock prices were increased by leveraged traders, but the actual crash was the result of failures of start up companies to produce profits. While all tech stocks fell together, sound companies with products and profits survive today. As for recessions, they are simply periods of time with decreased economic activity. Recessions can be caused by financial crashes, decreased demand following a war, or supply shocks like the oil crisis in the 1970's. In summary, debt is simply a magnifier. It can increase profits just as easily as can increase losses. The real problems with crashes and recessions are often related to unfounded faith in increasing value and unexpected changes in demand. "The statement can be true, but isn't a general rule. Crashes and recessions are two different things. A crash is when the market rapidly revalues something when prices are out of equilibrium, whether it be stocks, a commodity or even a service.  When the internet was new, nobody knew how to design webpages, so web page designers were in huge demand and commanded insane price premiums. I literally had college classmates billing real companies $200+/hr for marginal web skills. Eventually, the market ""clued up"" and that industry collapsed overnight. Another example of a crash from the supply point of view was the discovery of silver in the western US during the 19th century -- these discoveries increased the supply of the commodity to the point that silver coin eroded in value and devastated small family farms, who mostly dealt in silver currency. Recessions are often linked to crashes, but you don't need a crash to have a recession. Basically, during a recession, trade and industrial activity drop. The economy operates in cycles, and the euphoria and over-optimistic projections of a growing or booming economy lead to periods of reduced growth where the economy essentially reorganizes itself. Capital is a (if not the) key element of the economic cycle -- it's a catalyst that makes things happen. Debt is one form of capital -- it's not good, not bad. Generally cheap capital (ie. low interest rates) bring economic growth. Why? If I can borrow at 4%, I can then perform some sort of economic activity (bake bread, make computers, assemble cars, etc) that will earn myself 6, 8 or 10% on the dollar. When interest rates go up, economic activity slows, because the higher cost of credit increases the risk of losing money on an investment. The downside of cheap capital is that risk taking gets too easy and you can run into situations like the $2M ranch houses in California. The downside of expensive/tight capital is that it gets harder for businesses to operate and economic activity slows down. The effects of either extreme cascade and snowball." The root cause can be said to always be a crisis in confidence.  It may be due to a very real event.  However, confidence is what pushes the markets up and worries are what bring them down. A lack of trust in the regulator can also stop everyone trading.   If you don’t believe the bank notes you are getting paid with are real, why do any work?
"I also feel it's important to NOT get a credit card. I'm in my mid 30's and have had credit cards since I was 20, as has everyone I know. Every single one of those people, with the exception of my dad, is currently carrying some amount of credit card debt - almost always in the thousands of dollars.  Here is the essential problem with credit cards. Everyone sets out with good intentions, to use the credit card like a debit card, and pay charges off before interest accrues. However, almost no-one has the discipline to remember to do this, and a balance quickly builds up on the card. Also, it's extremely easy to prioritize other bill payments before credit card payments, resulting in a balance building up on the card.  It's almost magical how quickly a balance will build up on a credit card. Ultimately, they are simply too convenient, too tempting for most human beings. The world, and especially the North American world, is in a massive debt crisis. It is very easy to borrow money these days, and our culture is at the point where ""buy now pay later"" is an accepted practice.  Now that I have young children, I will be teaching them the golden rule of ""don't buy something until you have cash to pay for it in full!"" It sounds like an over simplification but this one rule will save you an incredible amount of financial grief over time." People were predicting a big market crash last year.  The fact is no one knows when it will happen, its really just speculation.  Yes, there will be a crash but when?  Idk, people say every 8 years from past history but who knows with all the technological advancements.  Plus the last real crash was 9 years ago (2008) when Congress rejected a bank bail out plan which caused mass panic. In your mind, what do you think the stimulus was? Obama throwing money out of a helicopter over an inner-city housing project? I'm tired of this stupid notion that those who were hurt the most by the recession somehow caused the recession. I like many of the answers, but here is a summary of reasons: Almost everyone will retire, and it is almost certain that government or company pensions schemes will not alone give you a lifestyle you would like in retirement. Money invested early is worth much more in retirement than money invested late, thanks to the miracle of compound interest. In some countries there are tax advantages to investing a little bit of money every year, compared with nothing for a few years and then a lump sum later. Much investment advice is given by investment consultants, who profit when you make investments. It's always in their interests to have you invest as early and as often as possible (that doesn't invalidate the first three reasons). Having said that, it isn't always in your best interests to invest in retirement funds very heavily at the start of your career. You might want to consider paying off any debts, or saving for a house, or even having a bit of fun while you are young enough to enjoy it. That back-packing trip to Nepal is going to be a lot easier when you are 23 than when you are 40 with kids. "I think people naturally overreact to crises. And, like you, I'm not really sure what the answer is. Capital requirements were a good start though. It also makes you wonder what would happen if ""mark-to-market"" accounting was not necessary, would the severity of the financial crisis have been muted?   At the same time, maintaining the value of worthless debt seems equally silly (I'm talking to you, Europe!).   Just an interesting time. I don't think things are as broken as people make it seem. 2008-9 was a big check and re-balancing. Unfortunately the consumers haven't been re-balanced like businesses due to poor employment and wages.  Sorry, I'm just talking in circles now." "The word ""good"" was used in contrast to ""bad"" but these words are misused here.  There are three kinds of debt: Debt for spending. Never go into debt to buy consumables, go out for a good time, for vacations, or other purchases with no lasting financial value. Debt for depreciating assets, such as cars and sometimes things like furniture. There are those who put this in the same category as the first, but I know many people who can budget a car payment and pay it off during the life of the car. In a sense, they are renting their car and paying interest while doing so. Debt for appreciating, money-making assets. Mortgage and student loans are both often put into the good category. The house is the one purchase that, in theory, provides an immediate return. You know what it saves you on the rent. You know what it costs you, after tax. If someone pays 20% of their income toward their fixed rate mortgage, and they'd otherwise be paying 25% to rent, and long term the house will keep up with inflation, it's not bad in the sense that they need to aggressively get rid of it. Student loans are riskier in that the return is not at all guaranteed. I think that one has to be careful not to graduate with such a loan burden that they start their life under a black cloud. Paying 10% of your income for 10 years is pretty crazy, but some are in that position. Finally, some people consider all debt as bad debt, live beneath their means to be debt free as soon as they can, and avoid borrowing money." This is a junk article with a junk assumption. We have higher levels of debts today, but we have low rates of defaults. We don't have NINJA loans coming to an end in 6 months where the default rate suddenly doubles and triples. We don't have massive amounts of swaps against mortgages or even other forms of private debt skyrocketing. Moody's and S&amp;P review process was totally revamped.  If this article could get beyond basic theory and talk about specifics, it might be able to make a point, but instead it lost me after 2 paragraphs. "I don't see how I'm biased in favor of the banks. Make no mistake, the banks are to blame for the collapse, more so than the government.  However I'm acknowledging the timeline and all the major players in this game, and that includes the government.  I addressed the role of banks selling risky mortgages susceptible to default, which includes predatory lending rates, highly leveraged individuals who buy investment properties, and subprime ARM loans.  Thank you for providing more detail.  I also addressed the securitization of risky mortgages into investment-grade debt, which could be sold to satisfy the ""Giant Pool of Money"".  Plus, I addressed how the banks lowered their standards to continue the supply of mortgages.  Feel free to directly cite [Paul Krugman](http://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/) as the source of your argument regarding the simultaneous growth of the residential and commercial RE.   Commercial RE was pulled along by  residential RE and the broader market rally (commercial land is highly cyclical).  Commercial RE prices rose as the market showed lower interest rates and higher land prices.  So commercial RE slightly lagged the housing market."