Are We Heading towards a Great Depression in Today's Economy - Research Paper Example

What the Government Can Do to Preclude Depression? or Today’s Recession and the Impending Depression With the alarming of the economy the United States is experiencing right now it seems that calling it another Great Depression has become only a problem of word association. Identifying it as another Great Depression can be put in proper context through history. What happened then and how is it different now? Is it too much of an exaggeration to call it so or are we just being euphemistic to avoid instilling fear? The events leading to the fall of Wall Street can aptly be called catastrophic. An event such as this is not unprecedented yet the hit that the stock market is experiencing these past few months is nothing short of tragic. The American economy is brought to a halt. And with the presidential elections recently concluded, we wonder if the president-elect will be able to save, or at the very least revive, the country’s flat lining economy. What is apparent is that there is a need for a re-assessment of the policies governing these markets. Analysts agree that this brings change to the outlook of America as the top superpower, financially (Faroohar, par. 2). Everyone who used to look up to the financial bigwigs of the United States in awe are now re-thinking if they are in fact right with their views. They are now shifting their thoughts toward a more favorable view of the significance of the government in trade and business. They are already projecting that this in the future will be the definitive moment when global capitalism was uprooted from the U.S. (Zakaria, par. 5-7). Fareed Zakaria in his article at Newsweek points out that today is the ‘Age of Bloomberg’ and the end of the ‘Age of Ronald Reagan and Margaret Thatcher’. Perhaps the plummet of laissez-faire capitalism towards something everyone is yet to figure out is something we can all agree upon. If necessary measures are not implemented quickly then this is heading nowhere but another Great Depression. What makes the difference is the knowledge that is available today based on history. Time is of the essence and as anyone can predict, if this continues to drag on into years, then, an impact as great as seen in history books or maybe worse will occur. Ironically, from the independence of a free and unobstructed market, businesses today are looking to the government to facilitate for their breathing room. The $700 billion to be passed on to the taxpayers seems to be too much at hindsight. The implosion of some of the world’s biggest investment banks left everyone dumbfounded. The Great Depression has always been associated with the percept of misery and fear among those who lived in that era. Unemployment reached its summit in 1933 at 24.9% and the stock market had an 89.5% of its value went down the drain (Matthews, par. 3). Then from a $104.4 Billion Gross National Product in 1929, it crashed promptly to $91.1 Billion in 1930 and government spending amounted to $800 million, all of this within a span of a year. (Rothbard 255). Fast becoming a highly consumerist society in the 1920’s, the population of the United States were impulsive in purchasing automobiles and other appliances as mass production was introduced. Advertisers were quick in thinking up of ways to sell their products to the eager to purchase public. As a result, the public was immobilized and a misdistribution of income was seen. (MacElvaine 153). Adam Smith took a different opinion against most who believed that a free market would correct itself in due time (243). He believed that the government should provide intervention and regulate the marketplace, that there should be set of rules and guidelines for everyone to abide by. Herbert Hoover once remarked that the problem with capitalism is the capitalists. This is proven time immemorial including with what is happening today. The mass was appalled as an inquiry on the indiscreet expenditure of executives granted by the bailout was conducted. This problem of avarice among them may be contagious. That this power that comes with money creates bubble that is affective to the economy in a whole. A contagion is created among those who are engrossed in the lifestyle. It was a Depression in a sense that the mass saw their affluence passing. It was the loss of prosperity that they have previously grown accustomed to. A number of things could be attributed to what caused the Great Depression; the debts and needed reparation from World War I, the absence of any new product in parallel to the amp in productivity, the vast amount of greed, the ratio of the supply of money with the gold standard, massive consumption and consumer debt (MacElvaine 156). In the 1930’s there was an evident bank panic regarding the bank suspensions that caused it to a full-pledge depression from a recession. Though the Federal Reserve was created specifically for the purpose of monitoring bank activities, alarm among banks was still present. Blame was laid on the leadership of the Federal Reserve. To put quite simply, the bureau was ineffective in its role of implementing its functions. They were weak at the core, therefore, they were not able to diminish alarm. (MacElvaine 93). What was also a source of dismay during the Depression was the injustice in the levels of suffering among the citizens. There was a domino effect as bankruptcies led to more bankruptcies. Thousands upon thousand of companies, fledgling or otherwise, were abolished. There were no suitable social programs that should have helped the people. Companies and families were financially incapable of recuperating from their losses. This continued on for years. Rock bottom was experienced between 1932 and 1933 when resources were exhausted and a feeling of collective anxiety and unrest was clear (Matthews, par. 7-8). The Federal Deposit Insurance Corporation was one of the most powerful creations during the Great Depression. The FDIC eliminated the long lines of agitated people in waiting lines of banks. It was a department created by the Federal Government to guarantee bank deposits up to a particular sum. The meltdown during the Depression even led newly-elected president Franklin D. Roosevelt to declare a bank holiday in 1933. Insolvency was declared by more than thirty thousand different financial institutions (MacElvaine 339). MacElvaine elaborated that this was an offshoot of the already surmounting crisis during the last part of Herbert Hoover’s administration. The proposal for the establishment of an agency initiated by the government started with Democrat Congressman Henry Steagall from Alabama. President Hoover together with a number of private bankers was adamant to expand the authority of the government towards the financial establishments. This sentiment changed during the presidency of Franklin D. Roosevelt. June 16, 1933 marked a hallmark in history as President Roosevelt signed the Federal Deposit Insurance Corporation into a law after all debates. As a regulation all banks were mandated to sign up with FDIC. This insured accounts to a maximum of $5, 000. All those who became members then are automatically participatory to the Federal Reserve System. The law allotted $150 million from government funds and payments by members. All that did not enroll in FDIC were immediately dismissed by the public. Those who did not want to be left behind then availed of the program. The FDIC logo since them became a pre-dominant mark among national banks. An indication of its success was the record that in 1934, a mere 32 banks declared bankruptcy (MacElvaine 340).This has become the reason for U.S. banks to be recognized as one of the safest in the world. Holger Schmieding introduced a solution to solving the current financial problem, he proposes looking at the situation that happened in Sweden in the 1990’s. During that time a similar economic bubble that pressed the country to a recession occurred. To answer the crisis, their government guaranteed the accountability of the affected banks and ensured the security of the depositors. They created a Bank Support Authority to aid the struggling banks with their finances. Banks were classified between ‘good’ and ‘bad,’ good banks are those that have tangible assets while bad banks were those that do not. This action was immediate in alleviating the weight of the recession though it took longer for the crisis to totally lose its gloomy effects. Eventually their economy recovered as a stronger foreign exchange rate continued to flourish. In five short years the government was able to obtain the money it invested in the banks during the crisis. A crisis that may seem to be contained in just one corporation and eventually affects the entire economic setup is no ordinary feat. Once this happen caution and action should constantly be in tow. What is necessary is a quick and decisive direction to supervise and reinstate trust from the public. In these cases the fact inadvertently remains that sometimes interference from the government is necessary regardless of the open market capitalist economy at play. Because ultimately the important thing is that what goes on in the board room should not have an adverse consequence to those in the streets. Schmieding admits that the actions Sweden took will not be absolutely applicable to the United States and its circumstance. But the active measures taken up by their government is a hint on the necessary steps that needs to be taken up if a serious answer to the recession is to be devised. If a country as small as Sweden can battle its recession effectively through its government then the same can be done on shore. Fourteen years ago a device was thought up to create something that would allow deviation of liability from the bank to a third party if loans from its clients were to default. Years after that brainchild of JPMorgan executives, the Credit Default Swap (CDS) was developed. It was fashioned so that the insurance risks from the banks would be delegated and therefore open up their reserves. It was an instrument that allowed them to avail of the necessary capital they have in stock to cover for unanticipated losses, in return they pay what might as well be called insurance premiums. They were unaware that what they have created is one of the biggest blunders in financial history. One of the biggest firms, American Insurance Group (AIG) had to be bailed out after its CDS amounting to $14 billion defaulted (Philips, par. 1-4). Aptly titled ‘The Monster That Ate Wall Street,’ Philips’ article delves on the problems that brought Wall Street to its knees. From $62 trillion, CDS dived to $55 trillion the previous month. An amount almost four times in value to all combined transaction dealt in the Stock Market at Wall Street (Philips, par. 7). Now the world over is suffering the rippling effect this has brought. Everyone was aware yet no one is prepared to the concurrent implosions among some of the biggest companies in the world. The credit default swap allowed for banks to endeavor into businesses like insurance and life plans. It is unmistakable that the CDS played a vital role in the problems. This is why the credit default swap is a monster that came back to haunt all that participated in its superficially implausible benefits. Lehman Brothers obtained over $700 billion with the AIG by its side. Because securities that are mortgage-based went dismal then it became impossible to regain its losses (Philips, par. 8). And we are all aware of what ensued after with both companies. Those who availed of a credit default swap in providers such as AIG are bound to endure vast losses and eventual credit setbacks. The 2008 bailout is by far the biggest in history. The $30 billion lending hand for the acquisition of Bear Stearns by JPMorgan, the seizing of Fannie Mae and Freddie Mac with $100 billion each for each corporation to guarantee they do not fall into bankruptcy, the $25 billion allotted to help the automotive industry and the biggest beneficiary, AIG, and the $122.8 billion bailout for their continued business. Another proposal for $700 billion is on the works to buy off and resell securities that are mortgage-backed (http://www.propublica.org). Some things remain clear, President Barack Obama needs a good plan to extinguish the country’s recession. And this is even more difficult as he is faced with multiple dilemmas that he cannot dismiss. This includes the country’s inflictive military obligations, the increased national debt and the immense federal bailout. Everyone remains hopeful that the flexibility of the system and the pliancy of its people will once again help America to recover its ground and not entirely lose its influence to the currently sophisticated and global world. Keeping an optimistic stance that it will once again bounce back just like it did in the 1930’s and in the 1970’s. Another aspect that is on the personal side of all this is the problem of income inequality. This is a global problem, it is accurate to say that the world’s poor population is insurmountable in relation to the affluent. Milanovic, an agent for the World Bank concluded that 25% of the richest in the world acquires 75% of the income in the entire globe. While the poorest at 75% get a hold of only 25% in total. This is a deplorable reality that everyone seems to set aside. What should be remembered about the Great Depression was what the population had to go through during those severe years. It dampened the human spirit and the absence of social protection from the administrations did not make things easier. There were no visible social security measures to help the people in their already difficult circumstances. It was only after a few years that the government became reactive and provided for its people to alleviate their agony. A health care system, social security and other welfare programs was then introduced to answer the outcries. In the current situation, it might serve a great deal for politicians to remember the Great Depression and be proactive in the treatment of its citizens. It should bring to a stop the wrong allocations and critical social programs and concentrate on the welfare of the people. The past should serve as a reminder and a paradigm for what should be undertaken in the future. It is a reminder that sometimes, everyone is molded the same way. (http://www.shambhala.org) It used to be that innovative concepts are the United States’ most valuable commodity. It was palpable that ideas distinctly American are what fueled the current trend of global philosophy. President Ronald Reagan campaigned for the lowering of taxes, lessened regulation and reduced visibility of the government will foster economic growth. In deduction, deregulation was the essence of Reaganism. Today, reviving the American brand poses a big question in the future of America (Fukuyama, par. 1-2). This is another challenge that will require time and effort to bear fruit. Countries today have a different momentum than they did previously. In a globalized foreign interplay, the U.S. will need to evaluate how it is going to play its cards. The trend of open economies makes it harder as the rules have significantly changed since the Reagan days. It used to be that the outlook was that tax cuts would cultivate internal financing and self-regulatory that in the end it will lead to higher revenues for the government. This question of whether deregulation still works for the economy has an apparent answer already. What was true then is not precisely what is accurate today. All of these call for initiative and endeavor on a new America. Politicians and commentators have to stop to recollect and think up what steps to take to revive the economy and re-invent policies. When asked why Democratic congressman John Lewis changed his vote on the bailout from no to yes, he replied that he realized “doing nothing is greater than the cost of doing something” (http://english.peopledaily.com). This is the reality U.S. has to contend with. The government cannot turn the other cheek and hope for the best as these landmark institutions are turning into shambles. It is not necessarily that the bailout will answer this problem, on the contrary, this may or may not in the future create other problems. The consensus is that it is better to act now and converge on a long-term solution along the way than to remain stooped. The current government has to be ingenious in solving the financial crisis. They face reconciling the tangible change in policies with appeasing the general retort of the people and businesses. Either way, a drastic change is imminent and a strong leadership is necessary to achieve its goals. Vital is another Franklin D. Roosevelt during the Great Depression and a Ronald Reagan conviction. They need to be intrepid and convincing with their policies. At the same time provide a progressive answer to the calls of the time. The only problem right now is that no one is quite sure yet exactly what the plan should be. But everyone agrees that they should be searched for. Otherwise, another Great Depression will continue to lurk in the shadows and it will only be a question of when and who will call a horse a horse. Works Cited Faroohar, Rana. “A New Age of Global Capitalism Starts Now.” 13 Oct. 2008:18-23. Financial bailout plan wins House approval, Bushs signature into law same day. 2008. People Daily. 4 Oct. 2008. . Fukuyama, Francis. “The Fall of America, Inc.” 13 Oct. 2008:25-28. History of U.S. Gov’t Bailouts. 2008. Propublica.14 Oct. 2008. . MacElvaine, Robert. “Causes of the Great Depression.” Encyclopedia of the Great Depression. Ed. Robert MacElvaine. 2 vols. United States: Macmillan Reference, 2004. MacElvaine, Robert. “Banking Panics (1930-1933).” Encyclopedia of the Great Depression. Ed. Robert MacElvaine. 2 vols. United States: Macmillan Reference, 2004. MacElvaine, Robert. “Federal Deposit Insurance Corporation.” Encyclopedia of the Great Depression. Ed. Robert MacElvaine. 2 vols. United States: Macmillan Reference, 2004. Milanovic, B. “True world income distribution, 1988 and 1993: First calculation based on household surveys alone.” World Bank, 1999. Philips, Matthew. “The Monster That Ate Wall Street.” 13 Oct. 2008:34-35. Schmieding, Holger. “A Lesson from Stockholm.” 13 Oct. 2008 Oct. 2008:16. Smith, Adam, ed. The Wealth of Nations Books I-III. United States: Penguin Classics, 2003. Rothbard, Murray. America’s Great Depression. 5th ed. United States: Mises Institute, 2000. What Caused the Great Depression of the 1930s?. 2008. Gold Ocean. 3 Nov. 2008. . Zakaria, Fareed. “The Age of Bloomberg” 13 Oct. 2008:12. Read More