In my opinion, a goodly portion of this is the result of the Fed trying to manage the economy and instead contributing to bubbles and crashes.
A lot of folks think that the Fed was formed as a result of the great depression to help stabilize the economy, but the Fed was in existence before the great depression. A lot of folks think that administrations (i.e., the democrats or republicans that happen to be in power at the time) control the Fed, but the Fed is not democratic or republican -- it is an independent entity and collection of banks with special rights. The Fed has the power to inject money into and take money out of our economic system, such as through the "open market" activities of, in effect, creating money and using it to buy government debt back from the public (causing interest rates to decrease) or by creating government debt and selling it to the public (causing interest rates increase). When people talk of decreasing interest rates, it means the Fed is pushing money into our economic system; and when they talk of increasing interest rates, it means the Fed is pulling money out of our economic system. That money injected into or taken out of the public sector goes into or comes out of other investments, which is why it has an impact.
The Fed is meant to use this control over money in the system to smooth our our economy (preventing bank panics, lessening irrational asset bubbles, avoiding things like the great depression, etc.). However, the Fed is controlled by fallable human economists; and economics, although considered a science, is very far from things like engineering or physics in terms of being able to calculate and prove correct solutions and courses of action. As one example, it has been more than 70 years since the great depression, and economists still do not all agree what caused it or how best to avoid such in the future, showing how imprecise the field still is.
To go back through just a couple of past bubbles and crashes, as a result of currency problems in the world (Russia, SE Asia, Latin America, etc.) and the collapse of Long-Term Capital Management (which had over a trillion dollars in derivative positions) in the 1990's, fearing contagion of the troubles and ramifications of the collapse, the Fed pressed on the gas pedal and pumped a bit of money into the system. Money pumped in goes somewhere -- in this case, helping to fuel (or at least not hindering) the dot-com bubble, which grew to insane proportions.
To reign in that "irrational exhuberance," the Fed then put on the brakes and started taking money out of the system. The unstable dot-com bubble (like most bubbles) didn't deflate in an orderly way -- it just crashed. From March of 2000 to September of 2002, the Nasdaq lost 76% of its value, trillions of dollars in wealth evaporated, and the economy took a dive. Also, there was the 9/11/2001 terrorist activity working to speed the economic downturn that was already well underway.
Now, the Fed stepped on the gas again, injecting a lot of money into the system, holding interest rates at historical lows for several years. As interest rates decline toward zero, real estate prices rise, entities can borrow increasingly larger sums (as they can still service the debt), which can be plowed into real estate that can be sold later at a profit, etc. We now had a real estate bubble growing to irrational proportions.
To reign in that bubble, the Fed started taking money out of the system (increasing interest rates). However, again, developed bubbles tend to be unstable, and like with the dot-com bubble, this one didn't deflate in an orderly way -- it just collapsed.
The Fed (and our government overall now) are again stepping hard on the gas, working to inject money into the system. I'm wondering what the next bubble will be. Alternative energy? Gold? I wish I knew.
Bubbles and crashes are part of the system whether the Fed is involved or not, but I have a suspicion there would be less volatility without the Fed than with it.
