Why does Raghuram Rajan think that 1929 type of Crash could recur soon?

In order to comprehend Raghuram Rajan’s warning, the causes of 1930’s Depression as they were linked to the Stock Crash of 1929 need to be understood.

The 1929 crash brought the Roaring Twenties to a shuddering halt. The crash marked the beginning of widespread and long-lasting consequences for the United States. Businesses found it difficult securing capital markets investments for new projects and expansions. Business uncertainty affected job security for employees, and as the American worker (the consumer) faced uncertainty with regards to income, the propensity to consume declined. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties including contraction of credit, business closures, firing of workers, bank failures and other economic depressing events.

The resultant rise of mass unemployment is seen as a result of the crash. The Wall Street Crash is usually seen as having the greatest impact on the events that followed and therefore is widely regarded as signaling the downward economic slide that initiated the Great Depression. The consequences were dire for almost everybody. It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying.

About 4,000 banks and other lenders ultimately failed.

Exuberance on stock markets drove the crisis. According to Raghuram Rajan, same could be happening now also with stock markets going higher by the day with real economy not supporting it and thus financial bubbles building that could eventually take down the real and financial economy with it.

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