Download The similarities between the causes of the Great Depression

The similarities between the causes of the Great Depression and the
current global economic crisis
The Great Depression and the current global economic crisis - to what extent
are the causes of these the same? Which are the similarities between the
causes of the GD and the current global economic crisis?
The Great Depression was triggered by the stock market crash in the 1929
and the effect was heightened by bank failures. In the present situation
there are neither stock market crashes as dramatic as those witnessed in
1929 nor are there banking failures. One of the main reasons for the
difference is there is close watch over the activities of the stock exchanges
and there are controls in place that will not allow a similar crash. Also the
Federal Reserve is very active and powerful and will not allow banks to crash
or go into liquidation.
The present situation began in 2007 with the subprime crisis. What followed
was the crash of investment bankers like AIG, Freddie Mac and the Lehman
Brothers. The basic difference between what happened in 1929 was that the
economy was essentially weak. There was widespread poverty and hunger
was widespread. Currently, even though there are economic pressures there
is no poverty of the type that existed in 1929. That apart the onset of
recession is relatively gradual. People have time to get used to driving less,
using less air-conditioning, less visiting, and less driving for shopping.
The changes that were seen in 1929 were that people used to take up
gardening and used whatever was produced. They cut down on shopping.
This situation now could mean a greater use of home-grown fruit and
vegetables, and more of home-spun cloth, dresses and scarves. Making
things at home will help overcome the financial pressures of the recession. If
the depression continues, the financial pressures will also increase.
There are several reasons why people compare the present situation to the
great Depression, the reasons are that during the Great Depression and
during the present situation there has been an asset price crash. Such
crashes have happened during the past and they don't lead to depression,
however, such crashes severely challenge the financial systems.
Another similarity is that there is a destruction of the capital markets. The
investment banking was separated from commercial banking by enacting a
law. Such a law has not been enacted now but the investment bankers did
crash. The commercial banks have held their ground and it is expected that
the Federal Reserve will not allow them to crash.
Another similarity is the movement away from capitalism. There are
indications that free market will be replaced by a regulated market. Back in
1930 there was regulation that was not in consonance with the principles of
capitalism. Way back in 1929 Hoover made the mistake of increasing taxes
when the business was down. Currently, Obama has stated that he will
increase taxes simply to reduce the budgetary deficit! This would be a
major mistake. During the Great Depression Hoover launched the
Reconstruction Finance Corporation. Even though this failed then, currently,
Paulson has launched 700 billion housing bailout fund. Even though the
banks in the USA have not fallen, thanks to the interventions of the Federal
Reserve, the Federal Reserve actions may produce severe inflation. This
never happened in the Great Depression. During the Great Depression
Smoot-Hawley tariff was levied. Even though this has not happened, USA is
discussing renegotiating the NAFTA.
Essentially when we compare the Great Depression with the present
situation, we realize that in spite of the differences there are some glaring
similarities. Before the Great Depression there was an increasing gap
between the rich and the poor, prior to the present situation there was also
a period of growing gap between the rich and the poor. It was observed that
before the Great Depression there was a period of stagnant wages, similarly
before the present crisis there was a period of stagnant wages. The effects
were also similar. When the Great Depression took place the Federal Reserve
attempted to change the course of the economy by decreasing the interest
rates. Even now the Fed is attempting to keep the interest rates low so that
it can improve the economy.
Consider this before the 1929 Great Depression there was a period when low
cost credit was available; there was a housing scam and rising inflation. In
the present situation, before the crisis started there was low cost credit and
there was imprudent disbursal of credit, similarly there was a housing
finance crises and rising inflation.
A deeper similarity between the Great Depression and the present situation
is that before the crisis there was unbridled speculation on the stock
exchanges. Another visible factor before both the Great Depression and the
present situation there was increasing unemployment rates. Overall, even
though the situation between what happened during the Great Depression
and present situation is very different, there are similarities when we look
deeper at the situation.
Also, what is the Keynesian theory and how does this relate?
The theory of Keynes was that the government should use the fiscal policy
to reduce the baneful effects of recession. He introduced his theory to battle
the Great Depression. According to the theory of Keynes increasing
government spending and reducing tax rates is the most expedient way of
stimulating the aggregate demand. He held that the government should
spend more for building the framework for strong economic growth and
working full employment. The theory holds that the excess spending of the
government by way of deficits will be paid for when the economy is
expanding. The government can then impose taxes and control inflation
during the period of economic growth. Keynes theory has had great impact
on the economists and politicians today. The increase in the government
spending and lower tax levels are in accordance with Keynes' theory. The
greater expenditure of the government is likely to increase the aggregate
demand. On the other hand if the government reduces its spending or
imposes additional taxes it will be counterproductive and recovery will be
delayed. In the context of Keynes' theory the stand of Obama that he will
increase taxes may lead to delay in the recovery of the economy. It is
believed by several economists that since the theories of Keynes,
government all over the world have intervened and have been successful in
reducing the impact of recessions. It is expected that Keynes' theories will
be applied by several governments in the present situation and the overall
effect will be that the effect of depression will be reduced.