The Great Depression and the Last Recession of 2008-2009 - Term Paper Example

Macro & Micro economics 4 December, Comparison between the Great Depression and the Last Recession of 2008-2009 The great depression is a great and serious historical economic disaster that began in 1929 and ended in 1939. The recession of 2008-2009 on the other hand was a shorter, yet serious crisis that began in late 2007, and whose impact among some nations are yet to end. The great depression and the last recession of 2008-2009 are different in terms of their lasting periods, causes, and effects on employment and world trade. Lasting period: The great depression is one great economic disaster that ever happened in history, making it greater than the recession in the modern times. Its impact hit the world for a long period that would see governments elect new leaders for several terms before it came to an end. Most of the African countries were still under colonial leadership and hence their independence came after the depression. It is estimated to have begun in October 1929, in United States, stretching across the next decade until 1939 (“The great depression,” thinkquest.org). At the beginning of the depression, Herbert Hoover was the president in United States, but transitions led to Franklin Roosevelt becoming his successor, while the country struggled to recover its economy. The end of the depression marked the beginning of World War II, where the United States appeared to be the chief creditor and source of funds for the war. The European nations were the most indebted to the United States; Germany and Great Britain suffered the most with regard to how their economies were devastated, as they struggled to pay war reparations, what they owed the United States, and change the weak state of their nations. The commonly referred 2008/2009 recession was termed as the worst so far since the postwar period. Precisely, its origin can be traced back in the United States after December 2007, in the emerging issues of the housing market; the economies linked with the United States had to experience the economic shock afterwards till the approximated time of its ending in June 2009 (EPI stateofworkingamerica.org). Majority of nations worldwide are in the better stages of recovery, and some have actually succeeded to overcome the tragedy. The global economy had shown progress before the recession, as most developing countries were working hard enough to raise their economies, since they had acquired development funds and support from the developed nations. Although the depression period was shorter, most developing nations were hit hard due to their linked economies and investments with developed nations. According to Cross, Canada stands out as the only G7 country that has entirely pulled out of the crisis compared to the rest six (statcan.gc.ca). In the United States, the recovery is yet to end though the economy’s progress is encouraging the citizens concerning their future. As for the European nations, the Euro zone crisis continues to affect their economies and industries to date. Most of their powerful nations like Italy, Ireland, Portugal and Spain are thriving on rescue program funds by the European bank and IMF (Raman ibtimes.com). Cause of the crisis: The great depression had earlier been preceded by another depression six months earlier, though its impacts were not severe. Great recession was initiated by the collapse of stock values in the New York stock exchange in October 1929; investors saw a quick and great loss in their shareholdings that after the next 3 years, the stock prices had reduced by 20% of their value in 1929 (“About the great,” illinois.edu). Before the decline of the stock prices, New York stock value had increased, which encouraged massive number of investors to purchase more stock, in the hope that it would pay back with much profits when the future stock prices raise. However, the stock prices expressed variation in a very short period before drastically dropping. The value of assets downturn did not spare financial institutions that held stock in their portfolios, which caused many to run bankrupt and come 1933, 11000 banks in the United States had closed after failure (“About the great,” illinois.edu). In the last recession, several factors had intertwined especially in the western world (United States, Europe and Asia) to create a good platform for the recession to occur. According to Alexander (898), the two issues attributed to the recession were the financial system crisis and the subsiding of real estate market, following the housing market price bubbling which surfaced in 2007. For a long period, political ambitions had aimed at providing wider access to homes ownership, for the low income society in the United States. The banks therefore, embraced new strategies for mortgage approvals, to avoid been biased on their view of loan eligibility, which created a baseline between the high and low income earners. As a result, trillions of dollars had been channeled to the global and United States financial markets, where banks relied on mortgage for issuance since they were collateralized loans. Later in 2006, oversaturation in housing markets reduced the rate of growth, which was followed by a hike of monthly mortgage payment that most low income earners could not manage to pay, considering there were other expenses they incurred (Alexander 898-900). The mortgage defaulters who left their houses to the banks increased in the period of recession, which led to high losses in invested finances as the market value of collateralized mortgage obligations was damaged. Employment: The great depression impact on the society left a big proportion of the population jobless and insolvent. Most of the resources that would have been utilized for production lay idle as most people thrived in poverty in the decade, since most businesses and industries had failed. Many citizens could not survive the difficult economic turn out and as a result, acquiring the basic needs (food, shelter and clothing) was also another challenge. The rate of unemployment dropped to less than 10 percent in 1941, just before the beginning of the World War II; most jobless families had moved to settle in shanties (“A case of unemployment,” ingrimayne.com). Back then, the dependence of industrialized nations of other raw materials through trade from other nations ensured that the impact was spread to all those nations. Although the population was much lesser than today, in 1933, the 37.6 percent of the unemployed citizens in United States were millions of people, who relied on their sole providers for survival (“About the great,” illinois.edu). (See fig.1) It was then obvious that most families would go hungry, when the husbands lost their jobs, not forgetting that the greatest number of women were housewives. Finding other options for survival proved difficult compared to today, because the presence of insurance mechanism had not gained roots to shield them from poverty, diseases, and unemployment issues. Fig.1. “About the Great Depression.” n.d. Web. 4 December, 2012 The 2008/2009 recession still remains a shocking event in the developing and European countries. As the global economy contracted, the citizens’ income flow declined and nations experienced a shortage in jobs. The household expenses had to be cut back to cope with the rising prices of commodities. The recession combined with increased fuel prices and most airlines companies had to merge to survive the credit crunch. In the United State, the labor market suffered 8.4 million job losses, which was equivalent to 6.1 percent of the total payroll employment (EPI stateofworkingamerica.org). European economies have declined and several industries have not recouped from the last global crisis. Companies like British airways and Iberia are under pressure to perform least they go bankrupt; earlier in the recession their consolidation rescued them from failure, as they made plans to lay off a great number of employees to reduce cost in their businesses (Leach telegraph.co.uk). Nations across the globe linked with the United States, and European nations via trading systems and financial investment became exposed, which resulted to high inflation in Africa. (See fig 2) Effect of last recession on world economic growth Fig .2. Verick and Islam. “The Great Recession of 2008-2009: Causes, Consequences and Policy Responses.” May 2010.Web. 4 December 2012. The difference from the great recession is that this round, food aid and insurance programs were available as rescue plans from the crisis. Unlike before most citizens are a working class, so the pressure exerted from the job loss of one household partner, would be covered up by the other one. World trade: The United States economic decline affected the primary exporting countries like the Latin America during the Great depression, since economic flow of income was highly dependent on the exports. Before, such countries administration piled their stock of products, which was dependent on Europe and USA recalling of their loans. Once the stockpiles were released in the market, the prices collapsed causing the raw materials exporters’ income to fall (“About the great,” illinois.edu). The impact of the crisis led to world trade disintegration between nations that had a common interest. Different currencies and political allegiance contributed to the formation of the limited trade blocks after the depression, something that has not occurred in the last recession. The last recession seemed to affect the middle income countries, far more than the low income countries. The commonwealth independent states, Eastern, and Central Europe were intensely affected due to domestic imbalances and credit crisis (Verick and Islam 22). However, most influential nations continued to grow and recover through their internal demand and administration spending. The working hours as well as the wages were distorted by the financial crisis, which generally led to reduction in the global output. According to Keppel and Worz (3), by May 2009, world trade had declined by approximately 20 percent, the United States and Euro area imports by 21 and 18 percent, and their exports by 20 and 19 percent respectively. Works Cited Alexander, Katkov. “The Great Recession of 2008-2009 and Governments Role.” Proceedings of ASBBS Vol. 18 no 1 (February 2011): 898-906. Web. 4 December, 2012. Cross, Philip. “How did the 2008-2010 recession and recovery compare with previous cycles?”13 January, 2011. Web. 4 December, 2012. EPI. “The Great recession.” stateofworkingamerica.org. n.d. Web. 4 December 2012. Keppel, Catherine and Worz Julia. “The Impact of the Global Recession in Europe - The role of international Trade.” i4ide.org/people. 26 February, 2010. Web. 4 December, 2012. Leach, Ben. “British Airways to Cut a Further100 Jobs.” telegraph.co.uk. 7 December, 2008. Web. 4 December, 2010. Raman, Manikandan. “Eurozone Crisis: Italy, Spain, Greece, Portugal and Ireland in Debt Web.”22 November, 2012. Web. 4 December, 2012. “The Great Depression.” thinkquest.org. n.d. Web. 4 December 2012. Verick, Sher and Islam Iyanatul. “The Great Recession of 2008-2009: Causes, Consequences and Policy Responses.” ftp.iza.org. May 2010.Web. 4 December 2012. Read More