Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:
Debt liquidation leads to distress selling and to Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation.
This contraction of deposits and of their velocity, precipitated by distress selling, causes
A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
A still greater fall in the net worths of business, precipitating bankruptcies and
A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to pessimism and loss of confidence, which in turn lead to Hoarding and slowing down still more the velocity of circulation.
The above eight changes cause
Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest. (Fisher 1933)
What I'm talking about is what bursts the "bubble" in the first place. - The Fed - and then it goes down the line. It's disinflation and deflation or tightenging of money. See Milton Friedman's Quantity of Money.
I'm not saying that there weren't problems that need correction. If I recall correctly the inflation rate of 4% for 2007 was too high.
What I want is justification for why it was allowed to go negative and NGDP to fall by 3.8% in the second half of 2008. That is when the Fed should have started stabilizing to the trend rate to keep this spiral from getting out of control, but it did not.
The Fed has more power today. So, for the Fed, the recent events have been good, for it. The economy is more centralized, and centralized out of Washington. This, is good, for the the Fed.
At all times bureaucrats will avoid risk to themselves, and attempt to secure their future existence.
You were asking the Fed to undertake risks to its existence. Not going to happen.
My personal opinion is that we have been there for over a year yet none of the consequences Fisher claims will happen have happened. In fact, the market has grown. What are people investing in? Why haven't we devolved into the state he describes?