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Compare the great depression and to the great recession - Essay Example

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Compare the great depression and to the great recession
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Essay 26 September Comparison of the Great Depression to the Great Recession Undeniably, the Great Recession is the most significant economic disaster to hit the American and global economies after the Great Depression. Interestingly, both economic crises share several variables. Hence, it is imperative to study the factors that caused and prolonged the Great Depression, in order for a quick recovery from the Great Recession. In addition, the former claim that only developing nations suffer from economic crises has proven false in the face of actual events. Therefore, it is integral to realize, that no economic model can so far save us from financial instabilities (Samuelson).
After the speculative boom of the 1920’s, Americans invested great amounts in the stock market. However, these were primarily financed through loans and almost two-third of the nominal value of stocks was represented by loans in 1929. Accelerated share prices motivated greater investment as people speculated that share prices would continue to escalate. Consequently, an economic bubble developed and the margin buying meant that investors would incur great losses if the market took a downturn. Similarly, the Great Recession resulted from speculation about mortgages and securities. It was a consequence of providing loans for homeownership to uncredit-worthy people. Mortgage loans were secured with mortgaged securities; so because of margin buying, banks were on the verge of bankruptcy when the market went into recession. Milton Friedman in his book, A Monetary History of the United States advocates that the Great depression was not a consequence of the economic cycles, tariffs or the Wall Street Crash (Friedman and Schwartz). In fact, what thrust the country into depression was the collapse of banks and financial institutes. Apparently, the same can be said for the Great Recession.
More than the actual effects of the Wall Street Crash of 1929, the psychological effects deterred investment in the capital markets. In turn, business security affects job certainty so that is why a decrease in capital investment led to a decrease in consumption. However, the Wall Street Crashes did cause bankruptcies, restriction on credit, failing businesses, rising unemployment, decreased money supply and the like. Likewise, the Great Recession led to a decline in international trade, increased unemployment, and dropping commodity prices.
The chain of events from significant federal spending to tax increases only aggravated both the crises. Thus, the leaders targeted the scapegoats such as the Wall Street Bankers for the crises. Roosevelt labelled them as economic royalists. Furthermore, he accused American investors for their capital strike, as investment came to a halt. Obama followed their example and held the Wall Street Bankers and other corporate investors as responsible for the Great Recession. He censured the bankers, oil corporations, and health insurance businesses for earning ever increasing profits (Folsom).
In 1933, it was proved that majority of top executives of banks had lent loans to Latin countries which were financed through securities sold to unsuspicious investors. Additionally, these executives received tremendous interest free loans and it was rampant amongst Wall Street’s elite class to buy stocks at shockingly low rates. What was even more unfortunate was that the largest bankers had evaded taxes after the Great Depression. This led to the implementation of Glass-Stegall Act that separated commercial and investment banking. Unfortunately, economists believe that the Great Recession occurred due to returning to those unfettered financial policies combined with partial implantation of Glass Stegall Act. Therefore, Wall Street’s role seems overstated in both the crisis (Woolner).
Although, the underlying causes for both economic crisis appear similar yet fundamental dissimilarities exist. For instance, US dollar based on gold reserves in the 1930’s is opposed to the free-floating currency of today. The Great Recession led to volatility in the gold market; in contrast, gold market was relatively steady during the Great Depression. Moreover, the Great Depression ensued in deflation whereas the Great Recession has resulted in inflation. Largely, the global financial organizations recovered much quickly after the Great Depression in contrast to the Great Recession. Now, the economy has set into a liquidity trap where monetary reforms have failed in the recovery of the economy. Furthermore, the Dow Jones Industrial Average, consumer price index, and unemployment rates also vary between the periods of 1930s and today. Despite the volatile fluctuations during the past few years, there have not been any record-breaking drops matched with 1930’s when DJIA fell by 8.4%.
Works Cited
Folsom, Burton W. “Comparing the Great Depression to the Great Recession.” The Freeman ideas on liberty (2010). Print.
Friedman, Milton and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. New York: Princeton University Press, 2008. Print.
Samuelson, Robert J. “Rethinking the Great Recession.” The Wilson Quarterly surveying the world of ideas December 2011.Print.
Woolner, David. “The Senate’s Dimon Hearing Was Sadly No Pecora Commission.” June 2012. Next New Deal The Blog of Roosevelt Institute. Thursday September 2012 . Web. Read More
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