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Concept about the Great Depression and Economic Recession of between 2008 and 2009
The state of the world economy depends on the performance of individual countries that play a significant role in its operations. For instance, the United States of America and the industrialized nations in Europe and Asia play a critical role in determining the stability of the international economy. The interrelationship in the markets of countries implies that anything that affects the performance of one economy affects the other resulting in multiple trickle-down effects on the stock exchange and manufacturing of commodities. The Great Depression and the recession of 2008 to 2009 are examples of how market dynamics influence the nature and state of the international economy. These two periods that stand out in the discussion of operations of economies both experienced an increase in the cases of unemployment, frugality and civic unrest. Despite these primary similarities, the scope of the economic crisis was radically dissimilar. For instance, during the Great Depression, the international market had not developed the structures necessary for reducing the extent of the bust. Furthermore, the Great Depression was defined by a severe double dip which is different from the global recession which maintained a steady growth rate. Though the growth proceeded at a slower rate during the downturn, it did not stop as was the case in the Great Depression. The periods also had remarkable differences in the levels of deficit spending, bank foreclosures, and manufacturing capacity.
The Great Depression is a remarkable and long-lasting economic slump that has ever hit the western industrialized countries to date. This period was marked by a drastic fall in economic performance in Europe and the United States. In the US, the depression started in 1929 following a crash of the stock market that caused a shock in the Wall Street and reduced the abilities of investors to borrow capital from commercial financial institutions and invest in various industries within the economy (Almunia et al. 255). The periods after this initial shock was characterized by a drop in consumer spending and investment. These declines in investment and consumer spending resulted in steep falls in the industrial output and increased cases of unemployment due to laying off of workers by the failing firms. The Great Depression reached its peak in 1933 resulting in more than a quarter of the unemployed Americans and failing of more than a half of the US banks.
The Great Recession was a global financial crisis which erupted from the bursting of the housing bubble in the United States resulting in one of the worst slumps in the world history since the Great Depression (Hetzel 683). Contrary to the common perceptions, the global economy was not very stable before the crisis, and most people had not sufficiently benefited from the stronger economic growth preceding the downturn (Verick and Iyanatul 35). Furthermore, multiple interrelated factors resulted in the emergence of the economic recession. These causes include loose monetary policy, global disequilibrium, wrong perceptions and weak financial regulations.
Differences between the Great Depression and the Economic Recession of between 2008 and 2009
Gross Domestic Product is one of the important indicators of economic performance that differentiates the Global crisis of 2008 from the Great Recession. In simplistic terms, a recession occurs when the growth of an economy contracts successively for two-quarters (Ball 16). Nonetheless, the severity of a recession is subject to the actual decline not just by the distinction between positive and negative progress. The 2008 recession was preceded by a slowing economic growth in 2007. The economy slowed in growth by -07 and +0.6 in the first and second quarters of 2008 respectively (Almunia et al 243). This increase then fell off drastically resulting in -4.0 and -6.8 growth rates for the third and fourth quarters respectively. In the first and second quarters of 2009, the economic growth rates were -6.40 and 0.70 respectively.
Based on the economic statistics above, it is evident that the fourth quarter of 2008 and the first three months of 2009 were the only two successive quarters that sustained a growth of below -0.5 since the Great Depression thus culminating into the global recession (Verick and Iyanatul 4). On the other hand, the aggregate size of the US economy measured by GDP sharply declined during the Great Depression as opposed to the recession that recorded periodic positive and negative growths. In essence, a drop of over 30% in the United States Gross Domestic Product occurred between 1929 and 1933 when the depression occurred. In absolute terms, the GDP measurements provide a clear difference between the Great Depression and the recession (Verick and Iyanatul 14). The global recession experienced periods of GDP losses which were then followed by a slow growth contrary to the Great Depression where a radical decline in economic growth occurred.
Despite the fact that there was a significant reduction in production in the manufacturing sector during both the Great Recession and Great Depression, there was a marked difference in the scale of the decline between the two periods. During the 2008-09 economic downturn, the industrial production lowered by 19% for the third quarter of 2008 and first quarter of 2009 after which it leveled off (Ball 6). On the other hand, the Great Depression realized a 12% decline in industrial production in the first three-quarters. Moreover, after the drop in three successive quarters, the industrial output did not recover before the year 1932. Therefore, only a half of the overall decline occurred during the first three-quarters of the Great Depression (Ball 7) Furthermore, the standard deviation for the drop in industrial output across all the countries during the recession was much smaller than in the depression.
The rates of unemployment at the height of the Great Recession
Apart from the disparity in the industrial production between the economic downturn and depression, there were also differences in the rates of bank disclosures. The number of banks failures in the US between the 30th of January 1933 and March 1933 which were critical periods of the Depression stood at approximately 50%. Nonetheless, the US only lost 0.6% of its banks during the recent recession (Almunia et al. 251). This comparison on the rates of bank foreclosures during the two eras shows that while the banks grappled with the difficulty in lending their customers during the Great Recession, thus leading to stagnation in business operations, they did not experience a severe situation like during the Great Recession.
While the rates of unemployment at the height of the Great Recession was more than 25% in the USA, the recession only recorded unemployment of 9.805 of the potential workforce. This data means that about one-quarter of the US active population did not get gainful employment during the Great Depression thus making the period at risk of repeated strikes and civil society unrest (Hetzel 685). Though the unemployment was also rife during the recession, strikes and public uprisings were uncommon. In response to the extended period of unemployment, many governments employed protectionism to safeguard employment opportunities for their locals. Europe applied more protectionism than the United States of America.
Unlike the Great Depression which predominantly affected the United States of America and Europe which operated without any central controls, the recession incredible affected virtually all the world economies but with various institutionalized organizations to manage it. For instance, in the recession, the G20, International Monetary Fund, and the European Union Commission helped to prevent protectionist policies that served to advance depression. The great recession experienced a double dip (Aiginger 29). A double dip in this context refers to the two major economic downturns. The first economic dip during the Great Recession happened from August of 1929 and ended in March 1993 while the second decline occurred from May 1937 through to June of 1938 (Aiginger 30). This trend did not take place during the recession which was primarily characterized by periods of gradual deflation, then growths which sometimes leveled out.
The Federal Reserve Bank of the US
The monetary policies during the two crises also differ appreciably. In the first three years of the Great Depression, the United stated Fed tolerated the downturn and supported a substantial shrinkage of the supply of money (Hetzel 10). It is evident the Federal Reserve Bank of the US withdrew money from the failing banks to prevent further loss instead of injecting liquidity into the financial system to change the trajectory of cash shortages into insolvency (Eigner, Peter, and Thomas 5). This policy applied by the Federal Reserve Bank contributed to the fall of many problematic banks, increased the downfall of some of them and resulted in further declines in the already unpredictable money supply and credits (Hetzel 6). On the other hand, in the first four months of 2008 when the recession occurred, the US Fed injected a significant amount of cash into the banking system (Eigner, Peter, and Thomas 7).. Based on these parallels policy responses to the crises, it is evident that the fiscal policy responses to the Great Recession resulted in its severe effects on the US economy.
The Great Depression was characterized by overreaching policies that tried to stabilize the falling economies. For instance, the United States Congress passed the Smoot-Hawley Tariff Act in the mid-1930s which raised the tariffs on more than twenty thousand imported commodities. In response to this damaging policy (Aiginger 32). Other countries that also experienced the crunching effects of the depression responded to this US policy decision by imposing restriction and competitive devaluations. This policy and counteracting policies by individual countries resulted in a severe contraction of the international business. Contrary to this financial policy trends, the economic recession did no experience devaluation among trading partners (Aiginger 28). In the 2008-2009 recession, there was a complete coordination of the monetary policies through various interventions such as swaps agreements between the central banks of different countries and other innovative agreements. The recession thus realized a marked departure from the Great Recessionts policies which had contributed to the deepening of the economic slump.
Another difference between the 1929-1933 depression and 2007-2009 crisis relates to how the government agencies and administrative bodies responded to it (Aiginger 27). There were two differences in the way the organizations reacted during the two periods in two distinct ways. The actions taken by governments in the recent crisis was proactive, landmark and swift. In contrast to the Great Depression, policymakers during the previous recession centered their efforts on bailing out the failing banking sector and other financial agencies (Hetzel 8). For instance, the in early 2008, the US Congress passed the Troubled Asset Relief Program. This move allowed the government to purchase toxic assets from the financial industry to the tune of $ $700 billion.
These Great Depression and Global Recession stand out in the discussion of operations of economies. The Great Depression is a remarkable and long-lasting economic slump that has ever hit the western industrialized countries to date. This period was marked by a drastic fall in economic performance in Europe and the United States. In the US, the depression started in 1929. On the other hand, the Great Recession was a global financial crisis which erupted from the bursting of the housing bubble in the United States resulting in one of the worst slumps in the world history since the Great Depression. These two periods experienced a dramatic increase in the cases of unemployment, financial instability and failing of financial sectors. However, these happenings were more pronounced in the Great Recession. These crises had some primary similarities but differed in the scope. For instance, during the Great Depression, the international market had not developed the structures necessary for reducing the extent of the bust. Furthermore, the Great Depression was defined by a severe double dip which is different from the global recession which underwent fluctuating performance of the economy. Though the growth proceeded at a slower rate during the downturn, it did not stop as was the case in the Great Depression. The periods also had remarkable differences in the levels of deficit spending, bank foreclosures, and manufacturing capacity.
Almunia, Miguel, et al. "From Great Depression to great credit crisis: similarities, differences and lessons."T Economic policyT 25.62 (2010): 219-265.
Aiginger, Karl. "The Great Recession vs. the Great Depression: Stylized facts on siblings that were given different foster parents." (2010).
Ball, Laurence M.T Long-term damage from the Great Recession in OECD countries. No. w20185. National Bureau of Economic Research, 2014.
Eigner, Peter, and Thomas S. Umlauft. "The Great Depression (s) of 1929-1933 and 2007-2009? Parallels, Differences and Policy Lessons." (2015).
Hetzel, Robert L.T The Great Recession: Market Failure or Policy Failure?Cambridge: Cambridge University Press, 2012. Print.
Verick, Sher, and Iyanatul Islam. "The great recession of 2008-2009: causes, consequences and policy responses." (2010).
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