Great Depression vs. Recession 2008
Great
Depression vs. Current Recession
The
onset of the current recession of 2008 and the great depression greatly differ.
Of course the depression was much worse than the recession and therefore, had a
lot more onsets of events that happened as opposed to the recession that we are
having now. However their similarities that is in both the recession of 08 and
the depression which helps us to understand the severity of our current
recession. The great depression is a good source of systems that work and
systems that fail for instance, Hoover’s tariff on foreign goods called Smoot
& Hawley slowed down the chance of the US economy getting better and
alienated the US from trading in International markets since there was retaliation
back for the tariff. (Shales 97-99)
From mistakes like this people can know the severity of the situation and find alternate ways to combat it.
The onset of the great depression however, is much more severe than the current recession. Unlike the current recession the depression had what were called a bank run which was an event in which there was a widespread withdrawal of money from banks, this lead to many bank failures. According to Econ Review of the 25000 banks and more in 1929 only 15000 survived in 1933.(The Econ Review 1) There is a similarity that there are bank failures going on in this current recession just not on a scale that has been seen in the great depression. According to the Washington Post there have been six bank failures in the month of January the most in any of the months in the current recession. This particular bank called Suburban Federal Savings Bank ran out of money that it needed to absorb losses on mortgage loans. This particular bank was sold to Virginia based Bank of Essex and fortunately all the deposits were protected unlike the great depression where some lost their whole life savings deposits. (Kleck 1)
There was also a problem in the banking industry as their customers could not repay their loans back. The real estate values fell and there were many foreclosures on mortgage loans. Many saving institutions had to go bankrupt during the Great Depression. There were also banks that handed risky loans the investors of the stock market. This act was risky because the investor doesn’t know if the stock will be a winner or not. The person who takes out the loan for investment in the stock market might not have the money to pay back if the investment fails(Waggoner 1). This is somewhat like today’s story of subprime loans being given to customers. The subprime loan is given to people with less than perfect credit who for instance might have had bankruptcy in the last five years. As quoted by CNN.com, “In some cases, the loans are then adjusted to a higher rate every six months to a year, making the monthly interest payment much higher than the borrower may have initially planned for.” The terms and conditions are obscured by predatory lending and ignorant borrowing. This of course does not go well for the lending industry as banks are very cautious and get limited as to who they will lend money to. The same thing happened in the great depression and was one of the sources of why the economy was slowed down farther.(Kleck 1) There is a distinct in the great depression and the current recession and that is there is rising unemployment even though the current recession pales in comparison to the great depression. In the great depression there was a great loss of jobs and skyrocketing unemployment that was only getting worse. In fact according to MSN Encarta between 1929 and 1932 unemployment soared from, “3.2 percent to 24.9 percent, leaving more than 15 million Americans’ out of work”. In today’s recession the prospect of 24.9 percent of Americans jobless might be miniscule compared to what is happening now however, the percentage is staggering according the Washington Post, “he recession already had cost 3.6 million through January. The unemployment rate, now at 7.6 percent, highest in more than 16 years, will probably hit at least 9 percent by next year.(Aversa 1)“ Which means that if we might see a percentage of unemployment rate that is similar to the great depression acceleration of unemployment from 3.2 percent to 24.9 percent between 1929 to 1932. (MSN Encarta 1)
Another interesting similarity of the today’s recession and the Great Depression is the stock market fluctuations. The plunges that the stock market in the great depression and the current recession has had are oddly similar. There also sharp declines in the Dow Jones industrial average, as described by USA Today, “Big declines in the stock market reduced people's wealth and decreased spending, notes Timothy Canova, associate dean of international economic law at the Chapman University School of Law. The Dow didn't fall steadily: It plunged 47% from its high of 381 in September 1929 through November 1929 and then started a famous "sucker's rally" in the spring of 1930 before plunging to 41 in July 1932.” There is a similar plunge that the Dow experienced in this recession as well as quoted from USA today, “The Dow fell 42% from its Oct. 9, 2007, high to its Oct. 27, 2008, low, roughly equal to the market's initial tumble in 1929.” (Waggoner 1) The USA today implies that there is a big difference as to why a repeat of the great depression will unlikely happen and that is, “But there are some big differences today that make a repeat of the Great Depression unlikely. The biggest: massive intervention by the world's central banks. "The Federal Reserve has been very aggressive in its role as lender of last resort," says Paul Kasriel, chief economist for Northern Trust. "That's why the Fed was created — not to prevent recessions, but to prevent the implosion of the financial system." Also in the great depression we had a destructive tariff that basically alienated us from foreign market and which proved to be a mistake, today we have international trade without a destructive tariff like Smoot and Hawley which was a tariff that raised fees off of imported products.(Shales 97-99) The Fed back in the 1920’s and 1930’s raised the interest rate which in turn drained liquidity from the system. If the interest rate were to go anywhere the rate would be going down in today’s standards as quoted in the USA today, “The Fed has cut interest rates nine times since the credit crisis began in September 2007. In addition, the Fed has created several credit facilities, which allow troubled financial institutions to exchange assets that they couldn't sell otherwise for ultrasafe Treasury securities.” Which means the Fed will go as far as helping troubled financial institutions with treasury securities in exchange for assets which were difficult to sell. In today’s government the 700 billion dollar bailout plan is proof that the government will intervene to try to prevent the economy from going into meltdown and to try and keep financial institutions afloat.(Waggoner 1) In these alternative and different ways that the recession is being handled now the country should not even encounter a Great Depression of the past because of well learned mistakes that happened in the Great Depression.
From mistakes like this people can know the severity of the situation and find alternate ways to combat it.
The onset of the great depression however, is much more severe than the current recession. Unlike the current recession the depression had what were called a bank run which was an event in which there was a widespread withdrawal of money from banks, this lead to many bank failures. According to Econ Review of the 25000 banks and more in 1929 only 15000 survived in 1933.(The Econ Review 1) There is a similarity that there are bank failures going on in this current recession just not on a scale that has been seen in the great depression. According to the Washington Post there have been six bank failures in the month of January the most in any of the months in the current recession. This particular bank called Suburban Federal Savings Bank ran out of money that it needed to absorb losses on mortgage loans. This particular bank was sold to Virginia based Bank of Essex and fortunately all the deposits were protected unlike the great depression where some lost their whole life savings deposits. (Kleck 1)
There was also a problem in the banking industry as their customers could not repay their loans back. The real estate values fell and there were many foreclosures on mortgage loans. Many saving institutions had to go bankrupt during the Great Depression. There were also banks that handed risky loans the investors of the stock market. This act was risky because the investor doesn’t know if the stock will be a winner or not. The person who takes out the loan for investment in the stock market might not have the money to pay back if the investment fails(Waggoner 1). This is somewhat like today’s story of subprime loans being given to customers. The subprime loan is given to people with less than perfect credit who for instance might have had bankruptcy in the last five years. As quoted by CNN.com, “In some cases, the loans are then adjusted to a higher rate every six months to a year, making the monthly interest payment much higher than the borrower may have initially planned for.” The terms and conditions are obscured by predatory lending and ignorant borrowing. This of course does not go well for the lending industry as banks are very cautious and get limited as to who they will lend money to. The same thing happened in the great depression and was one of the sources of why the economy was slowed down farther.(Kleck 1) There is a distinct in the great depression and the current recession and that is there is rising unemployment even though the current recession pales in comparison to the great depression. In the great depression there was a great loss of jobs and skyrocketing unemployment that was only getting worse. In fact according to MSN Encarta between 1929 and 1932 unemployment soared from, “3.2 percent to 24.9 percent, leaving more than 15 million Americans’ out of work”. In today’s recession the prospect of 24.9 percent of Americans jobless might be miniscule compared to what is happening now however, the percentage is staggering according the Washington Post, “he recession already had cost 3.6 million through January. The unemployment rate, now at 7.6 percent, highest in more than 16 years, will probably hit at least 9 percent by next year.(Aversa 1)“ Which means that if we might see a percentage of unemployment rate that is similar to the great depression acceleration of unemployment from 3.2 percent to 24.9 percent between 1929 to 1932. (MSN Encarta 1)
Another interesting similarity of the today’s recession and the Great Depression is the stock market fluctuations. The plunges that the stock market in the great depression and the current recession has had are oddly similar. There also sharp declines in the Dow Jones industrial average, as described by USA Today, “Big declines in the stock market reduced people's wealth and decreased spending, notes Timothy Canova, associate dean of international economic law at the Chapman University School of Law. The Dow didn't fall steadily: It plunged 47% from its high of 381 in September 1929 through November 1929 and then started a famous "sucker's rally" in the spring of 1930 before plunging to 41 in July 1932.” There is a similar plunge that the Dow experienced in this recession as well as quoted from USA today, “The Dow fell 42% from its Oct. 9, 2007, high to its Oct. 27, 2008, low, roughly equal to the market's initial tumble in 1929.” (Waggoner 1) The USA today implies that there is a big difference as to why a repeat of the great depression will unlikely happen and that is, “But there are some big differences today that make a repeat of the Great Depression unlikely. The biggest: massive intervention by the world's central banks. "The Federal Reserve has been very aggressive in its role as lender of last resort," says Paul Kasriel, chief economist for Northern Trust. "That's why the Fed was created — not to prevent recessions, but to prevent the implosion of the financial system." Also in the great depression we had a destructive tariff that basically alienated us from foreign market and which proved to be a mistake, today we have international trade without a destructive tariff like Smoot and Hawley which was a tariff that raised fees off of imported products.(Shales 97-99) The Fed back in the 1920’s and 1930’s raised the interest rate which in turn drained liquidity from the system. If the interest rate were to go anywhere the rate would be going down in today’s standards as quoted in the USA today, “The Fed has cut interest rates nine times since the credit crisis began in September 2007. In addition, the Fed has created several credit facilities, which allow troubled financial institutions to exchange assets that they couldn't sell otherwise for ultrasafe Treasury securities.” Which means the Fed will go as far as helping troubled financial institutions with treasury securities in exchange for assets which were difficult to sell. In today’s government the 700 billion dollar bailout plan is proof that the government will intervene to try to prevent the economy from going into meltdown and to try and keep financial institutions afloat.(Waggoner 1) In these alternative and different ways that the recession is being handled now the country should not even encounter a Great Depression of the past because of well learned mistakes that happened in the Great Depression.
References
Aversa, Jeannine. "Despite
stimulus, no quick turn for jobs, economy." Washington Post. 12
Feb. 2009. 13 Feb. 2009.
"Bank Failures Cause the Great
Depression." The Econ Review. 13 Feb. 2009.
Kleck, Kristi. "Looking for
ways out of the subprime mortgage crisis." CNN. 30 Mar. 2007. 13
Feb. 2009.
"Great Depression in the United
States." MSN Encarta. Microsoft Corporation. 13 Feb. 2009.
Shlaes, Amity. The
Forgotten Man : A New History of the Great Depression. New York:
HarperPerennial, 2008.
Waggoner, John. "Is
today's economic crisis another Great Depression?" USA Today. 4
Nov. 2008. 13 Feb. 2009.
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