The arguments that advocates for big government give about the causes for depressions and recessions. They do make reasons why they happen, but they don’t give reasons as to why these explanations happen.
In the beginning, it’s really all the Fed’s fault. The Fed injects large amounts of money into the financial system, thereby lowering interest rates and boosting consumption. Lowering interest rates means that entrepreneurs and investors tend to get more long term loans, because they don’t have to pay a ginormous interest.
But to invest into those long term goals and plans, there has to be a pool of savings to lend from. If people are consuming and destroying their savings, where are investors and entrepreneurs going to get there money from?
This cycle leads to mal-investments, and a further scrambling for capital. When people realize that there really is no capital, they start selling things off. This will include bankruptcy, lay offs, and all of the other ear marks of a depression/recession.
The time when people are consuming instead of saving, and when investors and entrepreneurs are getting loans for long term projects is called a boom. This boom as I already explained is just an illusion.
When reality catches up, in the form of companies having to pay back their loans with actual assets, that’s called the bust. In the terms of an Austrian economist, this period is known as a correction, because all of the mal-investments that happened due to the illusion of prosperity have to be repaid.
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