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These two factors would cause the economy to experience a sudden erosion of economic stability. At which point, a new Administration would begin: massive spending and enacting various regulations to address the causes of the Great Depression. This would help to provide stability to: the economy and it created a foundation for placing some kind of support in the different economic structures (i.e. banks / the stock market). What all of this shows, is that the lack of taking any kind of action from the federal government would make the situation worse. As it would cause the depression to begin and have devastating effects. Then, when they finally decided to do something about it, the policies would essentially negate each other. What put an end to the Great Depression was: the massive amounts of government spending on social programs and new regulations to address the underlying causes.
Causes of the 2008 Global Economic Crisis
The causes of the 2008 Global Economic crisis began with deregulation and globalization. What happened was, deregulation was taking place in response to various calls from politicians, who felt that government had become too intrusive, in the matters concerning the economy. Where, many analysts and economists believed that if various regulations were reduced they could be able to compete more competitively. The reason why is because this pressure was increasing, due to the fact that the globalization (the reeducation of trade barriers) were making many businesses more competitive. In the financial world this was troubling, because some of the different laws from the New Deal (the Glass Steagall Act) would limit the size and the activities of: banks, brokerage firms as well as insurance companies. The Glass Steagall Act was: a law that forbid various financial institutions from becoming involved in each other's business activities. The idea was that by limiting the size and activities of these industries, you can control their risks and possible exposure to the economy (in the event of a financial collapse). As the economy began to grow, various financial institutions would begin to call for the dismantling of the Glass Steagall Act. (Stareny, 2010, pp. 47 -- 48) Once the law was repealed in the late 1990's this would cause the size and scope of financial institutions to increase dramatically. At the same time, various hedge funds would begin to explode. They would trade in host of different instruments. This is important, because it shows how the innovations in the financial world would set the stage for various trading activities. (Baru, 2009, pp. 3 -- 38)
Then, the Federal Reserve was dramatically lowering interest rates in the aftermath of the September 11th. This was in response to the terrorist attacks and the lingering dot com bubble that was hanging over the economy. Over the course of time, this would lower interest rates to such a point, that many banks and other financial institutions were offering easy terms (on a host of different lending products). This would cause many consumers and businesses take out a significant amount of debt. At the same time, mortgage rates and the reduction in lending standards at various financial institutions (through deregulation) would make these products widely available. In many cases, the traditional standards of qualifying for various loans were often waved. As the belief was that the high amounts of debt would translate into increased income, from the interest of the different loans. All of these: consumer, business, residential and commercial loans were packed into what is known as tranche. This is where, they will take different mortgages and bundle them together (offering a higher interest rate). At which point, they would be sold to large financial institutions, banks, brokerage firms, hedge funds and individual investors around the world. Once interest rates began to increase and the economy started to slow, this would cause many people who owed money to different financial institutions to default on their loans. This would have ripple effects on the credit markets, as no one could be able to trade these loans. This is because there was no way to accurately value them. As the economy began to slow and the value of real estate declined even more, the price of would become difficult to determine. This would affect the liquidity of businesses and financial institutions. As they did not have access to the credit market (because they are frozen) and they were holding assets they could not sell. Once the various loans began to default this would have a ripple effect on large insurance companies that had underwritten the debt and were financially liable. When put these different elements together, it would mean that institutions such as: Lehman Brothers would become insolvent overnight. (Kolb, 2010, pp. 77 -- 86)
In response to what was taking place, the government would engage in massive bailout programs. Where, they would pump billions of dollars into various financial institutions and the credit markets. The idea was that by having the government serve as the lender of last resort, it would help to provide stability to many businesses. This is important, because it would give them the financing for various operations that support their daily activities. During the early stages of the crisis, this would play a major role in preventing the situation from spiraling out of control. (Bonnick, 2010, pp. 61 -- 68)
At the same time, the government would engage in various actions to relieve the different burdens on home owners (through the Home Affordable Modification Program) and consumers (i.e. Cash for Clunkers). These different programs were important, because they would allow various loans to be modified for home owners, so that they could reduce their mortgage payments (avoiding possible foreclosure). The Cash for Clunkers program would allow the consumers to trade in their expensive SUV's for fuel efficient cars. This would help to support the auto industry (through increased sales) and it would reduce the debt / expenses of consumers (by allowing them to purchase more affordable vehicles). (Bonnick, 2010, pp. 61 -- 68)
When you step back and analyze the government's response to both economic events, it is clear that the lack of response during the early part of the Great Depression would make the economic situation worse. Then, when the government did respond, the actions were often taken were half hearted or contradictory to other parts of their strategy. This would basically negate any kind of support they were trying to provide. At which point, the economy would fall into a more pronounced economic contraction. Once Roosevelt became President, the government would begin to provide social services (through massive amounts of spending) and addressing the causes of the depression (through increased regulation). This is different from the government's response during the 2008 Global Economic Crisis. Where, they would provide massive amounts of liquidity and loans to various businesses as well as consumers. This would help to mitigate the effects of the crisis, as it would prevent the economy from falling into a similar downward spiral that was experienced during the Great Depression.
Clearly, the response by the federal government during the Great Depression and the 2008 Global Economic Crisis would have an impact on future economic growth. The reason why, is because when the economy enters these kinds of situations, added amounts of liquidity are required to maintain the stability of the system. In the Great Depression this did not take place, as the lack of a response from the government would allow the situation to become worse. Then, once a response did take place, it would have no effect on preventing the runaway economic implosion. It was not until the government would address the fundamental issues facing the financial system and provide stability to key industries; that their actions would help to mitigate these effects. Evidence of this can be seen by looking no further than various regulations that protect the economy and the financial system from one institution becoming too big. However, as deregulation and globalization would have an impact on these views. This would create a similar situation as to what occurred in 1929 (only this time it was 2007). The difference was that the federal government responded to the situation early, preventing the downward spiral in economic activity that was taking shape in 2008. This is significant, because one could argue that the actions taken during a financial crisis will determine if the underlying effects will become worse. As a result, it is obvious that the government bailouts were necessary, in protecting the economy from facing a similar situation as to what occurred from 1929 -- 1933.
Baru, S. (2009). The Global Economic Crisis and U.S. Power. Economic Meltdown. (pp. 3 -- 38). Seattle, WA: National Bureau of Asian Research.
Bonnick, K. (2010). Securitization. Why to Big to Fail. (pp. 61 -- 68). New York, NY: Author House.
Edsforth, R. (2000). A New Deal in 100 Days. The New Deal. (pp. 121 -- 149). Malden, MA: Blackwell Publishing
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Depression The Great Depression Pre-Depression Economy Summary • Write a journal entry describing a weakness in your chosen character's sector of the economy that would later contribute to the Great Depression. • Write a summary of the weaknesses in the American economy that contributed to the Great Depression. The Great Depression was one events of the twentieth century that defined the entire century. It was the longest lasting and most widespread financial crisis in the
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