Comparison of The Great Depression and The Great Recession - Essay Example

Comparison of The Great Depression and The Great Recession A recession can be defined as a significant reduction in economic activities that runs for a period of many months. The term Great Recession is used to describe a prolonged economic downturn that was severe. Economists trace The Great Recession during December 2007 to the fall of the housing markets of United States. According to National Bureau of Economic Research (NBER), the recession went on for many months but it ended officially in June 2009 (Robert 81). Global investment banks were jeopardized by exposure to sub –prime mortgages. This ignited the financial crisis, which required a bailout from the United States’ banks. Some of the affected banks were Stearns and Lehman brothers (Robert 81). This paper seeks to expound on the Great Recession in, the role of the Federal Reserve in the issue and the US in response to the scenario. On the other hand, the Great Depression was a severe economic depression globally in the period before the World War II. The depression started around 1930 and went up to 1940s depending on the country (Romer 1). In the 20th century, the Great Depression was the longest and most widespread. The genesis of the depression can be traced in United States around 4th September 1929 after the fall of prices in stock. The historical economic slump covered most of the industrialized areas of the world such as Europe and North America (Canterbery 137). The collapse of the stock market prices catastrophically on the New York stock exchange marked the beginning of the Great Depression in 1929. The consecutive three years saw the continual fall of the US stock prices. This ruined thousands of investors, strained many financial institutions, and banks especially the ones whose portfolios held stocks. This consequently made them insolvent. The resultant outcome was reduction in spending, demand, and finally production hence aggravating the downward fall (Romer 2). This led to fall in output and drastic unemployment rise (Gunderson 81). It is notable that the devastating effects of the Great Depression affected both rich and poor countries. Prices of goods, profits, personal income, and even tax revenue dropped. Moreover, the international trade nosedived by more than 50%, unemployment rate in United states increased by 25% ( Gunderson 54). In trying to draw parallel and to exclusively compare the great depression and the great recession of 2008, it is important to recognize and accept that the world of 1930 and the world today are radically different. For instance there is a substantial difference in the US economy of today and that of 1930. The difference can be seen from what people eat, wear and the means they go to work. However, we can use the currency for instance the US dollar in our comparison. When we compare the value of goods or the prices of products in US in 2008 and 1930, they are totally different. Comparison of the prices may not always be uniform in difference, but they reflect societal changes in not only value perception, but also the way of life in America (Pew Research Centre 9). While discussing the difference in purchasing power, between 2008 and 1930, it is important that microeconomic and societal developments in the culture of the American such as civil rights, inventions such as microwaves are not overlooked. During the great depression, the Federal Reserve did little to rescue the economy because of limited policy actions by currency backed by precious metal. During the onset of the depression, Fed was aware that there was need for expansion in supply of the money, by lowering requirements of reserves in the banks (Rothbard 87). However the reduction done by the board of governors was not enough to create an impact and hence the country stuck in a decade long deflation, slow growth and unemployment (Canterbery 131). There was similarity at the origin of the great recession but policy response was totally different to what Fed did. The central banks of today have fiat currencies unlike precious metal backed currencies. Therefore during crisis, the Fed “creates” artificial money by increasing bank deposit of members at the Federal Reserve which the public can be lent. During 2008 recession saw Fed printing money worth$2.1 trillion to rescue the financial intermediaries and rejuvenate the economy by financing fiscal efforts (Robert 81). According to Canterbery (131), the recovery of the financial systems of the world was quicker during the Great Depression of 1930s than the great recession of the late 2000s. In comparing and contrasting the Great Depression of 1930s and the recession of 2008, it is evident that the US dollar measured in the gold standard was different completely in today’s dollars which free floats. Furthermore, the economic recession of 2008 was much different with 1930s depression in that the monetary policies adopted by the United States government was unable to resuscitate the economy back to life. This condition could be described as in “liquidity trap.” Consumer price index (CPI) during the Great Depression was at 17.3 in 1929, spiraled downwards to 12.6 in 1933, and did not rise again until 1943 (Gunderson 54). However, when compared to 2008, the CPI was at 216.573 and fall slightly in 2009 before stabilizing to 218.178 in 2010 (Robert 81). This indicate that the intensification of the crisis in 1930s was due to the deflation in United States. However, the 2008 crush survive deflation that could have prolonged the recession. In addition, the CPI fell to 13.3 three years after the crash of the stock market in the 1930s. In contrast, CPI stood at 226.545 in august 2011. Unlike the Great Depression witnessed in 1930s, the Great Recession was compounded by integration of markets worldwide. This was worrying because recessions that are synchronized always last longer than any other economic downturns and their recoveries are always slow. Moreover, during the great economic recession; there was alarmingly long term unemployment. For example in the United States, almost half of the unemployed were noted to have stayed six months out of work. This was abnormal because such figures in American history have never been seen since the time of Great Depression (Robert 81) When we compare the two world’s economic downfalls in terms of stock market, there is a difference in how the stock prices faired. Dow Jones Industrial Average (DJIA) dropped by 8.4 % just three months after the 1929 crash (Gunderson 54). This is contrary to the Great Recession of 2008 where there were no drops similar to the capacity of 1929 which was record shattering. The two great crashes had similarity in terms of wealth gap reaching skewed extremes. Almost half of the number unemployed persons for over six months were out. By closely analyzing the US inflation rate in 1930s after the crash of the stock market, there was a fall into a deflationary pit of about -10% and it remained there for about 4 years. In comparison to the recession of 2008, the economy of US seemed to slip into a slight gully of deflation of near -2% for only one year (Robert 81). In 2008, the next closest percentage loss for a day from October 2008 was about 7.8%. However, the economy of US of 1929 appeared to fall and went into a deep sleep unlike in 2008 where it appeared to struggle back to its feet. The Great Recession was severe and took longer time to last than other recessions before. However, the level of the economic decline did not surpass the level witnessed during the Great Depression. The recessions prior to the great recession lasted for about 16 months whereas the great recession went to over 20 months. Furthermore, looking at both timeframes and comparing failures of the banks, the great depression was worst because about 50% of the total banks in the US closed compared to 1% which failed during the great recession. The investors were spurred to take another look at precious metals by the 2008 crash. This was a standard used in 1930s to compare the US dollars after the great depression and the US dollar value in 2008 rested in gold. This is contrary to 1930s the gold price which was stable. Work cited Canterbery Ray E. The Global Great Recession. World scientific publishing company. 2011. Print. Gory Gunderson. The Great Depression. ABDO publishing company. 2010. Print. Pew Research Centre. How ?The zGreat Recession Has Changed Life in America. 2010. Web. < http://www.pewsocialtrends.org/files/2010/11/759-recession.pdf >. Roberts Michael. The Great Recession. Lulu.co publishers. 2009. Print. Romer Christina D. Great Depression. Encyclopaedia Britannica. 2003. Web. < http://elsa.berkeley.edu/~cromer/great_depression.pdf > Rothbard Murray N. America’s Great Depression, 5th ed. Misses Institute. Print. Read More