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The stock market crash that took place in 1929 and the resultant Great Depression remains the greatest economic crisis that the world has ever experienced. The length and depth of the crisis have remained legendary within the global economic circles. Thus, when another global…
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Macro & Micro economics: Paper2 1500 The stock market crash that took place in 1929 and the resultant Great Depression remains the greatest economic crisis that the world has ever experienced. The length and depth of the crisis have remained legendary within the global economic circles. Thus, when another global financial crisis struck in 2007/2008, many analysts predicted the occurrence of another economic depression or at least something closer to it. In order to understand the correlation between these two periods of economic and financial upheaval. This paper analyzes some stylized facts concerning the depths of both crises, with close attention to ways in which stock prices, GDP, employment, manufacturing production and overall economic policy reacted in both cases.
Before making the comparison between the Great Depression and the financial crisis of 2008, it is prudent to perform and analysis of the pivotal differences in the nature of the capitalist system now and in 1929. It is noteworthy that the rise of neo-liberal capitalism in the 1970s, and the post-war shift to Keynesian economics that followed it precipitated the era of capitalist development. This was fundamentally different from the previous economic regimes, including the period after the Great Depression.
Several arguments have been made regarding the main causes of the recent global financial crisis, and even though it may be hard to discern the exact causality. There are a number of factors that remain clear. Firstly, in a similar manner to the Great Depression before it, before the onset of the financial crisis, the world economy experienced a boom period with a rapid growth rate between 2001 and 2007. The rate of growth during this period was higher than any other period in the preceding thirty years (Wade, 2008). In this regard, most analysts concur that the financial crisis was initiated by the collapse of the subprime mortgage bubble in the United States. However, this fact was not the primary cause of the crisis. Secondly, even though the emerging financial crisis first appeared in early 2007. It was not until the year 2008 when major banks such as the Lehman Brothers began going to the wall, and financial assets started crashing that the full extent of the crisis became apparent. As a result, credit flows dried up, and the global financial situation became dire with each passing day. One clear example of this situation is the subprime mortgage crisis in the United States. For instance, there was $130 billion of subprime lending in the country in the year 2000, but this figure had risen to more than $600 billion in the year 2005 (Wade, 2008). With such trends, the ‘speculative orgy’ was one again back with a huge bang. The situation was further exacerbated by the creation of innovative financial instruments by way of credit default swaps and other debt securities. For instance, the CDA on mortgage bonds was eight times more than the value of the bonds as at the year 2006. Thus, when the financial crisis hit the world market, all that wealth was wiped out (Wade, 2008).
It is plausible that the immediate causes of the financial crisis revolved around excessive debt leverage and imprudent lending. However, even though, the most prominent factor that led to the financial crisis was the prospect of losses on the subprime market. The shortcomings in government responses are also blamed for the severity of the crisis. For instance, there was the sudden stop of syndicated lending of asset-backed securities in 2007 (Wade, 2008). Other contributory factors included the deficiencies in risk management within the private sector. In addition to these is banks’ overdependence on short-term wholesale funding, statutory loopholes in the regulation of special purpose vehicles, and the excessive leverage on businesses, households, and financial firms.
In conclusion, it is clear that the financial crisis resembles the Great Depression on a number of aspects. For instance, both periods of the economic downturn were preceded by an extended period of rapid economic growth. Furthermore, each of the two periods experienced speculative bubbles that were based on the flow of easy credit, and this fueled both stock market and property bases excess. The only difference between the two periods is that the nature of the capitalist system had changed significantly from productive industrialization to a system of financial capitalization.
References
Wade, R. (2008). The First-World debt crisis of 2007-2010 in a global perspective. Challenge, 51, 4, 23-54. Read More
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