Comparisons between the Great Recession and the Great Depression

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Comparisons between the Great Recession and the Great Depression explores the experiences in the United States and the United Kingdom.

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On April 17, 2009, head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronized by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries. [1]

The chief economist of the IMF, Dr. Olivier Blanchard, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in 1928–1929. [2]

In the United States

Dow Jones Industrial Average figures for percentage lost in 1937-1943 vs 2008-2011 (based on initial 1937 and 2008 DJIA month end amount, respectively) 1937 to 1943 vs 2008 to 2011.png
Dow Jones Industrial Average figures for percentage lost in 1937–1943 vs 2008–2011 (based on initial 1937 and 2008 DJIA month end amount, respectively)

Although some casual comparisons between the Great Recession and the Great Depression have been made, there remain large differences between the two events. [3] [4] [5] Actually, if the magnitude of initial shocks was the same in both cases, the recovery from the latest one would be earlier. [6] The consensus among economists in March 2009 was that a depression was not likely to occur. [7] UCLA Anderson Forecast director Edward Leamer said on March 25, 2009 that there had not been any major predictions at that time which resembled a second Great Depression:

"We've frightened consumers to the point where they imagine there is a good prospect of a Great Depression. That certainly is not in the prospect. No reputable forecaster is producing anything like a Great Depression." [8]

Differences explicitly pointed out between the recession and the Great Depression include the facts that over the 79 years between 1929 and 2008, great changes occurred in economic philosophy and policy, [9] the stock market had not fallen as far as it did in 1932 or 1982, the 10-year price-to-earnings ratio of stocks was not as low as in the 1930s or 1980s, inflation-adjusted U.S. housing prices in March 2009 were higher than any time since 1890 (including the housing booms of the 1970s and 1980s), [10] the recession of the early 1930s lasted over three-and-a-half years, [9] and during the 1930s the supply of money (currency plus demand deposits) fell by 25% (where as in 2008 and 2009 the Fed "has taken an ultraloose credit stance"). [11] Furthermore, the unemployment rate in 2008 and early 2009 and the rate at which it rose was comparable to most of the recessions occurring after World War II, and was dwarfed by the 25% unemployment rate peak of the Great Depression. [9] However, syndicated columnist and former Assistant Secretary of the Treasury Paul Craig Roberts claimed in a 2012 column that if all discouraged workers were included in U.S. unemployment statistics, the actual unemployment rate would be 22%, comparable to rates during the Great Depression.[ citation needed ]

Nobel Prize–winning economist Paul Krugman predicted a series of depressions in his The Return of Depression Economics (1999), based on "failures on the demand side of the economy." On January 5, 2009, he wrote that "preventing depressions isn't that easy after all" and that "the economy is still in free fall." [12] In March 2009, Krugman explained that a major difference in this situation is that the causes of this financial crisis were from the shadow banking system. "The crisis hasn't involved problems with deregulated institutions that took new risks... Instead, it involved risks taken by institutions that were never regulated in the first place." [13]

On February 22, 2009, NYU economics professor Nouriel Roubini said that the crisis was the worst since the Great Depression, and that without cooperation between political parties and foreign countries, and if poor fiscal policy decisions (such as support of zombie banks) are pursued, the situation "could become as bad as the Great Depression." [14] On April 27, 2009, Roubini expressed a more upbeat assessment by noting that "the bottom of the economy [will be seen] toward the beginning or middle of next year." [15]

On April 6, 2009 Vernon L. Smith and Steven Gjerstad offered the hypothesis "that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge." [16]

In his final press conference as president, George W. Bush claimed that in September 2008 his chief economic advisors had said that the economic situation could at some point become worse than the Great Depression. [17]

A tent city in Sacramento, California was described as "images, hauntingly reminiscent of the iconic photos of the 1930s and the Great Depression" and "evocative Depression-era images." [18]

According to economist Irving Fisher, the two dominant factors in a depression are over-indebtness to start with and deflation soon after. [19] Fed policy to prevent deflation at all costs has been greatly influenced by Fisher's work. [20]

In the United Kingdom

On 10 February 2009, Ed Balls, Secretary of State for Children, Schools and Families of the United Kingdom, said that "I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy." [21] On 24 January 2009, Edmund Conway, Economics Editor for The Daily Telegraph , had written that "The plight facing Britain is uncannily similar to the 1930s, since prices of many assets – from shares to house prices – are falling at record rates [in Britain], but the value of the debt against which they are held remains unchanged." [22]

Related Research Articles

In economics, a recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster. There is no official definition of a recession, according to the IMF.

An economic depression is a period of carried long-term economic downturn that is the result of lowered economic activity in one or more major national economies. It is often understood in economics that economic crisis and the following recession that may be named economic depression are part of economic cycles where the slowdown of the economy follows the economic growth and vice versa. It is a result of more severe economic problems or a downturn than the recession itself, which is a slowdown in economic activity over the course of the normal business cycle of growing economy.

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive.

<span class="mw-page-title-main">Causes of the Great Depression</span> Overview of the causes of the Great Depression

The causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. The specific economic events that took place during the Great Depression are well established.

<span class="mw-page-title-main">Austerity</span> Economic policies intended to reduce government budget deficits

In economic policy, austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spending, raising taxes while cutting spending, and lower taxes and lower government spending. Austerity measures are often used by governments that find it difficult to borrow or meet their existing obligations to pay back loans. The measures are meant to reduce the budget deficit by bringing government revenues closer to expenditures. Proponents of these measures state that this reduces the amount of borrowing required and may also demonstrate a government's fiscal discipline to creditors and credit rating agencies and make borrowing easier and cheaper as a result.

<span class="mw-page-title-main">Nouriel Roubini</span> Iranian-American economist

Nouriel Roubini is a Turkish-born Iranian-American economic consultant, economist, speaker and writer. He is a Professor Emeritus since 2021 at the Stern School of Business of New York University.

<span class="mw-page-title-main">Household debt</span> Combined debt of all people in a household

Household debt is the combined debt of all people in a household, including consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.

The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics seeking to explain how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit due to artificially low interest rates set by a central bank or fractional reserve banks. The Austrian business cycle theory originated in the work of Austrian School economists Ludwig von Mises and Friedrich Hayek. Hayek won the Nobel Prize in Economics in 1974 in part for his work on this theory.

Economic stagnation is a prolonged period of slow economic growth, usually accompanied by high unemployment. Under some definitions, slow means significantly slower than potential growth as estimated by macroeconomists, even though the growth rate may be nominally higher than in other countries not experiencing economic stagnation.

At the micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm. It is the opposite of leveraging, which is the practice of borrowing money to acquire assets and multiply gains and losses.

Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending and by extension, a reduction in spending.

<span class="mw-page-title-main">Great Depression</span> Worldwide economic depression (1929–1939)

The Great Depression was a period of severe global economic downturn that occurred from 1929 to 1939. It was characterised by high unemployment rates, crisies of liquidity, and widespread business failures around the world. The economic contagion began around September 1929 in the United States, the largest economy in the world. Economic historians usually consider the devastating Wall Street stock market crash of October 1929, often referred to as "Black Tuesday," to have been the catalyst of the Great Depression.

<span class="mw-page-title-main">Great Recession</span> Global economic decline from 2007 to 2009

The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009. The scale and timing of the recession varied from country to country. At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression.

<span class="mw-page-title-main">Depression of 1920–1921</span> Sharp deflationary recession

The Depression of 1920–1921 was a sharp deflationary recession in the United States, United Kingdom and other countries, beginning 14 months after the end of World War I. It lasted from January 1920 to July 1921. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.

<span class="mw-page-title-main">2008–2009 Keynesian resurgence</span> Great Recession-era revival of interest in aggregate demand-side economics

Following the global 2007–2008 financial crisis, there was a worldwide resurgence of interest in Keynesian economics among prominent economists and policy makers. This included discussions and implementation of economic policies in accordance with the recommendations made by John Maynard Keynes in response to the Great Depression of the 1930s, most especially fiscal stimulus and expansionary monetary policy.

<span class="mw-page-title-main">Lost Decades</span> Period of economic stagnation in Japan

The Lost Decades are a lengthy period of economic stagnation in Japan precipitated by the asset price bubble's collapse beginning in 1990. The singular term Lost Decade originally referred to the 1990s, but the 2000s and the 2010s have been included by commentators as the phenomenon continued.

Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or even advantageous. Similarly, inflationist economists advocate for an inflationist policy.

<span class="mw-page-title-main">Causes of the Great Recession</span>

Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and the following recession include lax lending standards contributing to the real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

<i>The Return of Depression Economics and the Crisis of 2008</i> 2008 edition of 1999 book by Paul Krugman

The Return of Depression Economics and the Crisis of 2008 is a non-fiction book by American economist and Nobel Prize winner Paul Krugman, written in response to growing socio-political discourse on the return of economic conditions similar to The Great Depression. The book was first published in 1999 and later updated in 2008 following his Nobel Prize of Economics. The Return of Depression Economics uses Keynesian analysis of past economics crisis, drawing parallels between the 2008 financial crisis and the Great Depression. Krugman challenges orthodox economic notions of restricted government spending, deregulation of markets and the efficient market hypothesis. Krugman offers policy recommendations for the prevention of future financial crises and suggests that policymakers "relearn the lessons our grandfathers were taught by the Great Depression" and prop up spending and enable broader access to credit.

<span class="mw-page-title-main">Balance sheet recession</span> Type of economic recession

A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.

References

  1. ↑ Evans, Ambrose (2009-04-16). "IMF warns over parallels to Great Depression". London: Telegraph.co.uk. Archived from the original on 2009-04-17. Retrieved 2010-01-21.
  2. ↑ The Telegraph (UK), 2010 Sept. 14, "IMF Fears 'Social Explosion' From World Jobs Crisis: America and Europe face the worst jobs crisis since the 1930s and risk 'an explosion of social unrest' unless they tread carefully, the International Monetary Fund has warned,"
  3. ↑ Bagnall, James (2009-03-16). "Not the Great Depression". The Ottawa Citizen. Archived from the original on March 22, 2009. Retrieved 2009-04-10.
  4. ↑ Collyns, Charles (December 2008). "The Crisis through the Lens of History". Finance and Development. 45 (4).
  5. ↑ Charlemagne (March 5, 2009). "Extremist nightmares". The Economist. Retrieved 2009-03-12.
  6. ↑ Baten, Jörg (2016). A History of the Global Economy. From 1500 to the Present. Cambridge University Press. p. 110. ISBN   9781107507180.
  7. ↑ Isidore, Chris (2009-03-25). "The Great Recession". CNN Money. Retrieved 2009-04-10.
  8. ↑ "The difficulty with economic forecasting". Marketplace. American Public Media. 2009-03-25. Archived from the original on 2010-12-05. Retrieved 2009-03-26.
  9. 1 2 3 Tatom, John (2 February 2009). The Superlative Recession and economic policies (PDF). MPRA Paper No. 13115.
  10. ↑ Bajaj, Vikas (March 14, 2009). "Has the Economy Hit Bottom Yet?". New York Times. Retrieved 2009-03-15.
  11. ↑ Hanke, Steve H. (March 16, 2009). "Unconventional Wisdom". Forbes . Archived from the original on December 6, 2010. Retrieved December 23, 2011.
  12. ↑ Krugman, Paul (2009-01-05). "Fighting Off Depression". The New York Times. Retrieved 2010-05-07.
  13. ↑ "Not the Great Depression". Ottawacitizen.com. Archived from the original on March 22, 2009. Retrieved 2010-01-21.
  14. ↑ "Roundtable: Nationalizing the Banks - ABC News". Abcnews.go.com. Retrieved 2010-01-21.
  15. ↑ 'I Am Not Dr. Doom', Washington Post.
  16. ↑ Gjerstad, Steven (2009-04-06). "Steven Gjerstad and Vernon Smith Explain Why the Housing Crash Ruined the Financial System but the Dot-com Collapse Did Not - WSJ.com". Online.wsj.com. Retrieved 2010-01-21.
  17. ↑ "George W. Bush Press Conference Transcript, January 12, 2009". Foxnews.com. 2009-01-12. Retrieved 2010-01-21.
  18. ↑ "NBC Nightly News with Brian Williams: News and videos from the evening broadcast NBC Nightly News with Brian Williams: News and videos from the evening broadcast- msnbc.com". MSNBC. Archived from the original on 2003-12-07. Retrieved 2010-01-21.
  19. ↑ Fisher, Irving (October 1933). "namely over-indebtness to start with and deflation following soon after" (PDF). Retrieved 2014-10-16.{{cite journal}}: Cite journal requires |journal= (help)
  20. ↑ "Indeed, some say the Fed has learnt Fisher too well". The Economist. 2009-02-12. Retrieved 2012-05-15.
  21. ↑ "UK | UK Politics | Recession 'worst for 100 years'". BBC News. 2009-02-10. Retrieved 2010-01-21.
  22. ↑ Conway, Edmund (2009-01-23). "Britain on the brink of an economic depression, say experts". Telegraph. London. Archived from the original on 2009-01-30. Retrieved 2010-01-21.
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