Our Current Recession Term Paper

  • Length: 8 pages
  • Sources: 5
  • Subject: Economics
  • Type: Term Paper
  • Paper: #63848909

Excerpt from Term Paper :

trace the historical causation of the current recession - the causal factors. Currently, America and most of the world is experiencing a severe recession. The causes of that recession are many, and the fallout is severe. There are many similarities with the current recession to the Great Depression of 1929, and there are differences that set each recession apart. When compared close up, the Great Depression was much worse than the current recession, and that may be at least in part because of governmental measures used since the Great Depression.

The Great Depression

The Great Depression, which began in 1929, was one of the worst worldwide depressions in history. Most people believe the Great Depression occurred after the fall of the stock market in 1929, but it actually began before that. A reporter notes, "The Great Depression of the 1930s began with falling demand for durable and investment goods in mid-1929, followed by a slowdown in business activity. The stock market crash of October 1929 reduced the assets held by many investors and consequently their willingness and ability to buy" ("Whatdunnit? The Great Depression Mystery").

Unemployment was rampant, and there were numerous bank failures that added to the country's misery. The reporter continues, "Between 1929 and 1933 there were more than 9,000 bank failures in the United States. When Franklin Roosevelt took office, 38 states had already declared 'bank holidays' -- suspending all banking activity to prevent bank failures" (Whatdunnit? The Great Depression Mystery"). In addition, consumerism was rampant in the 1920s, just as it was before the current recession. The reporter continues, "U.S. prosperity in the 1920s had been-based to a large extent on the sale of houses and automobiles. Consumers for the first time could buy houses and cars on the installment plan, and they were eager to do so" (Whatdunnit? The Great Depression Mystery"). The Great Depression led to differences in many areas of finance, which may have actually helped ease at least some of the effects of the current recession.

One big difference between the current recession and the Great Depression is how long each lasted. The Federal Reserve believes the current recession eased in late 2009, and that the country is on the long road to recovery. The Great Depression really did not end until America entered the war in 1941. Unemployment reached nearly 50% in some large cities like Chicago, and when the Dust Bowl occurred in the 1930s, thousands more displaced agricultural workers left the Midwest to search for employment in the west. Poverty, unemployment, and housing were all affected during this time, and it was only the increased production and economy of the war years that helped put Americans back to work and on the road to prosperity after the war.

The Federal Reserve's Role

The Federal Reserve came into being in 1913, as a reaction to a deep recession in 1907. The recession caused a run on banks and many banks to fail. It created eight Federal Reserve banks across the country, and a Board that sat in Washington, D.C. And oversaw the banks. Federal Reserve banks could issue certificates that were legal tender to banks if the occasion arose. The purpose of the Reserve was stated in the preamble to the Federal Reserve Act of 1913. It reads, "To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes'" (Shull 49). The Federal Reserve sets interest rates, monitors banking, and helps guide the economy, but it does have its detractors. Another reporter states, "The Fed's policy of intervening in the economy to push interest rates lower than the market would have set them was the single greatest contributor to the crisis that continues to unfold before us" (Adelmann).

As in the current recession, the Federal Reserve played a distinct role in the Great Depression. However, they played a negative role, because they did not participate in helping to keep banks from failing. The reporter continues,

"The Federal Reserve System had been established in 1913, in part to prevent bank failures by lending reserves to banks that were experiencing unusually high cash withdrawals. On the eve of the Depression, the first concern of the 12 regional Federal Reserve Banks should have been the overall health of the financial system. But many of the regional presidents, formerly commercial bankers, hesitated to lend to banks in their districts that they considered unsound. Many banks thus were allowed to fail, and the failures caused fear among account holders in sound banks, prompting them to panic and withdraw their funds" (Whatdunnit? The Great Depression Mystery").

After the Great Depression, the Federal Reserve gained power, and it has continued to gain power and control after every economic downturn the country has experienced since World War II. Another writer notes, "The Federal Reserve System has grown and developed extensively over the past ninety years. The System's early aims and functions have been elaborated" (Shull 15). However, it has also been heavily criticized in the way it has dealt with many financial crises; including the way it handled the Great Depression.

Many critics charge that the Federal Reserve helped create the housing bubble that eventually burst, by keeping interest rates too low for too long. Another writer notes, "By pushing very short-term interest rates down so dramatically between 2001 and 2004, the Fed lowered short-term rates relative to 30-year rates. Adjustable-rate mortgages (ARMS), typically based on a one-year interest rate, became increasingly cheap relative to 30-year fixed-rate mortgages" (White). Federal Reserve chairman Ben Bernanke answers those charges. He says, "Monetary policy during that period -- though certainly accommodative -- does not appear to have been inappropriate, given the state of the economy and policymakers' medium-term objectives" (Adelmann). However, others believe the Federal Reserve could have predicted the housing bubble would burst much sooner, and should have raised interest rates to discourage sub-prime lending practices.

Just as throughout history, the Fed gained additional power after the federal bailout and near failure of many financial institutions. Another author notes, "In addition to conducting monetary policy, the Fed took on the new role of selectively channeling credit in favored directions. It now makes loans to, and purchases assets from, an array of financial institutions that are not commercial banks and do not issue means of payment" (White). This occurred in 2008, and the policy continues today. Many experts find this extremely disturbing, because the Fed was created to monitor banks and be the "lender by last resort," instead of a group that allocates credit to certain institutions. They have funded about $1.7 trillion dollars to banks and credit institutions, compared with the Treasury Department's $700 million (White).

It is important to note that the Federal Reserve has started these procedures on their own, with no oversight. Author White continues, "The Federal Reserve's new interventions into financial markets over the past year have proceeded at its own initiative, without precedent, and without congressional oversight" (White). He and others imply the Federal Reserve has far too much power now, and is acting more like a hedge fund. If the Fed fails, it could have a much deeper effect on the economy, and a long-term effect, as well. This takeover in power is unprecedented, and it worries many economists who feel the Federal Reserve has gone too far in taking power and offering credit, which has nothing to do with their traditional role as overseer and manager.

The Housing Policy

Many critics blame the Federal Government for the current recession. They feel the Federal Reserve should have played more of a role, but they also blame the government for very lax lending and housing standards. Chairman Bernanke says, "The best response to the housing bubble would have been regulatory, not monetary;' he concluded" (Adelmann). The collapse of Freddie Mac and Fannie May seem to help point to the lack of regulation, and that regulation is still not really a priority in Congress. Tougher legislation on lenders and their lending policy could have prevented much of the current recession, and it could have helped keep the government from bailing out investment firms who gave too much credit to failed mortgage companies because they did not anticipate the falling housing prices that helped the bubble to burst.

The Current Recession

Like the Great Depression, there are several causes of the current recession, and they are as complex as the Great Depression's causes, as well. Two experts write, "The current recession, which began in December 2007, will easily be the longest post-war recession, though likely not the most severe. The housing recession, which started in 2006 and was exacerbated by the financial crisis that began in August 2007, precipitated the economic recession" (Brinkmann, and Velz). At the heart of the current recession in the housing market, which rose dramatically from 2004 through 2006. Housing prices rose dramatically, sometimes doubling…

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