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“It was the greatest and boldest operation ever undertaken by the Federal Reserve System, and, in my judgment, resulted in one of the most costly errors committed by it or any banking system in the last 75 years. I am inclined to think that a different policy at that time would have left us with a different condition at this time… Business could not use and was not asking for increased money at that time.” 

Adolph Miller, former Federal Reserve Board Member, testifying to the U.S. Senate in 1931 about the Federal Reserve’s 1927 interest rate cuts and acceleration of open market purchases – which fueled speculation and low-quality credit expansion that culminated in the 1929 peak, collapse, and ultimately the Great Depression. 

"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand." 

Ludwig von Mises, The Causes of Economic Crisis (1931) 

Plus ça change, plus c'est la même chose. The more it changes, the more it’s the same thing. One would think that the lessons from policy mistakes that led to the Great Depression and the Global Financial Crisis would have been remembered more vividly, but we can take solace that at least on the surface, it appears that those lessons are at least beginning to be remembered. On Wednesday, Federal Reserve Chair Janet Yellen began to openly recognize the risks to financial stability that have emerged after years of aggressive monetary experimentation by the Federal Reserve: “we’ve also seen a compression in spreads on high-yield debt, which certainly looks like a reach-for-yield type of behavior. I would highlight that equity market valuations at this point generally are quite high. Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”