The Great Depression Economic Crisis
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Great Depression Economic Crisis
The great depression was an economic crisis that started in 1929. Since the 1920s, the American public initiated a hype of investing in the speculative market. this investment affected both the real estate market and the stock market. An increase in money supply due to the increased margin trading led to an increase in asset pricing and the inactivity and a subsequent overactivity by the Fed led to the crash of the stock market. the stock market fell by 90% and subsequently crashed. The issue is important to the economics and social structure of the time in that most people lost their wealth and jobs and had no livelihood. By 1933, the unemployment rate had increased to 24.9% from 3.2% by 1929 (Segal). This affected other economies in the world and become the longest recession in the modern world.
This event relates to the financial crisis of 2007-2008. The event started in 2001 when the Fed reduced the federal funds rate. This allowed banks to offer cheap credit to high-risk customers. Consumers took advantage and borrowed to purchase goods more so houses and the increased demand for houses increased house prices. The practice of securitization allowed banks to bundle the mortgages and sell them to other banks. The subsequent increase in the federal funds rate from 2004 to 2006 and the housing market reaching saturation meant that many people were unable to repay their mortgages and the demand for houses was low meaning banks could not repossess and sell the houses (Elliott). This led to the collapse of big banks and weakening the portfolio of other banks. The effects were that many people lost their homes, businesses and savings. This increased unemployment, poverty and inflation globally.
Both events are similar in that they affected the global economic system. In the U.S, both events increased poverty, unemployment and loss of livelihoods for the poor. It is also significant to note that in both events, the Fed had a big stake in that their policies or inactivity contributed to the events. Both events led to people losing their livelihoods and taking longer to recover. In addition, the events were both caused by a hype by consumers in that the great depression was precipitated by the hype in the speculative market trading by consumers. The financial crisis was also caused by the hype in the housing market.
The two events are however different in that the great depression lasted for a long even after numerous direct government intervention actions. some of the intervention actions such as the Smoot-Hawley Tariff Act of 1930 worsened the condition. In the financial crisis, the government responded with policies and the economy recovered over time but the poor lost more than the rich and no one was ever prosecuted for financial crimes. The great depression clearly demonstrated how inadequate policies can damage an economic system and this translated well in the financial crisis. Policies that are not well articulated can easily backfire and destroy the economy even in the present.
Segal, Troy. “What Was The Great Depression?”. Investopedia, 2019, https://www.investopedia.com/terms/g/great_depression.asp.
Elliott, Larry. Global Financial Crisis: Five Key Stages 2007-2011. The Guardian, 2011, https://www.theguardian.com/business/2011/aug/07/global-financial-crisis-key-stages.
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