http://en.wikipedia.org/wiki/List_of_recessions

To the extent that your implicit argument regarding centralized banks exacerbating economic downturns holds water, I think it is a symptom, not a cause — central banks make it easier for the government to screw things up because it has access to a centralizing tool that, as Friedman and other monetarists have shown and Keynes inadvertently admitted, can leverage government miscues into massive screw-ups. To paraphrase Archimedes, Give FDR a place to stand, and he’ll prolong the depression by four years or so. The costs of these Keynes-inspired blunders have to be balanced against the benefit of Volcker/Greenspan “tight money” policies that simulate tying U.S. currency values to commodities.

What he said.

Faith in the U.S. economy and increasing world-wide savings (resulting from world-wide economic growth) led to a glut of investment available to American borrowers. This surplus investment resulted in low interest rates (the P in your supply-demand curve).

The exceedingly low interest rates then resulted in asset appreciation rather than real growth(i.e. homes overvalued and corporations over-leveraged). Basically, the U.S. was over-valued.

The American economy, for all its problems, is still a fundamentally sound one. If we allow the correction to work itself out, we will once again attract capital, which will help fuel real growth rather than asset appreciation. On the other hand, if we try to protect the over leveraged borrowers, by freezing adjustable rates for example, we are just going to scare off future investment.

Why no one blames the Fed for this mess is beyond me. The Fed does not smooth out the business cycle, it causes the business cycle.