I wrote this recently in an online debate. Would folks here please tell me if there are any points which are not quite right or complete?...
The last two bubbles, like all bubbles, were caused by monetary expansion. In the 90s the Fed created so much extra money out of thin air that it drove interest rates extremely, artificially, and temporarily low. Investors responded by putting their money in dot-com stocks whose business models only involved profits in the far distant future. Only when credit is extremely cheap do such extremely-long-term profit models seem viable.
But central banks can't expand the money supply without pause forever without causing hyperinflation (or as establishment economists say, without "overheating"), so they slowed the expansion. This brought interest rates to a lower level, under which the extremely-long-term profit models of the dot-com stocks were no longer viable, so the value of those stocks crashed.
What was needed then was a recession during which assets were taken out of the hands of failing enterprises and revalued according to the more-realistic interest rate. Instead, so as to avoid any pain whatsoever, Bush-Greenspan turned on the money spigot, slashing interest rates to 1%. This time the extremely, artificially, and temporarily cheap credit was funneled by Wall Street, Fannie Mae, and Freddie Mac into housing, driving up home prices. Again, investors (including this time regular home buyers, commercial banks, and "conservative" investment banks), lulled into a false sense of security by the "Greenspan put" (the notion that expert central bank management had, as shown by the handling of the dot-com and 9-11 dips, mastered the business cycle) assumed the cheapness of credit (and resultant rise in house prices) was natural and somewhat permanent.
Of course it wasn't, and once the money spigot was turned down, interest rates went back up, mortgage holders went bust, home prices crashed, and this time the whole over-levereged American economy crashed too.
What is the government's answer to the current crisis which was caused by monetary expansion? More monetary expansion of course. A trillion here, a trillion there. Interest rates down to zero. This will only cause yet more misallocation of the tiny amount of wealth we haven't destroyed yet, and will likely result in a flight from a soon-to-be rapidly devaluing dollar. This flight will spiral into hyperinflation. The government will probably respond to THAT with price controls, which will only strangle production and lead to massive unemployment and poverty.
Austrian Theory of the Business Cycle in 9 steps (Soliciting comments)
The thing that is missing from your analysis is a limiting factor. Why can't the Fed keep expanding the money supply indefinitely? Ben Bernanke certainly thinks he can do precisely that and is trying to prove it now.
The limiting factors are natural resources and labor. Monetary expansion causes more business to come on line as you pointed out; but those new businesses have to bid against the existing businesses for a finite supply of raw materials. At some point some of these bidders become unprofitable and fail. If there had been savings instead of monetary expansion, raw material consumption would have been released for new uses.