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Posted: May 5th, 2020
The Great Depression and the Great Recession of 2008 are the biggest economic crisis recorded in the history of the United States. The main cause of both economic downturns lay deep in the actions of the federal government. The effects were enormous; unemployment rates spiked, the money market industry collapsed, major banks failed and threatened the existence of many more. While there are quite a number of similarities between the great depression and the great recession, there are also notable differences that set them apart.
The Great Depression run from 1929 to around 1939. In the years that preceded the Great Depression, the Federal Reserve kept the interest rates artificially low. In 1929, they raised the interest rates to offset the economic boom experienced in the early 1920s. The increased interest rate was a huge blow to investors. President Hoover later signed the Smoot-Hawley Tarif in 1932 that choked and halted entrepreneurship even further. The Federal Reserve also failed to increase the money supply to combat the deflation. As a result, the price levels fell by 22%, and the GDP plummeted by 31%. Consumer spending and investments dropped, which caused a steep decline in industrial output. Failing companies laid off their workers, unemployment levels increased to 25%, and almost half of the banks failed.
A decade ago, in 2008, the United States was hit by yet another even larger economic shock worse than the Great Depression. While the major impacts of the Great Recession were felt in 2008, the signs could be felt as early as 2006 when the house prices began falling. But the Bush administration did not realize how serious the situation was getting. By 2007, the Federal Reserve made the first response to the subprime mortgage crisis by adding $2.4 billion in liquidity to the banking system. The Federal reserve assumed that the strong money supply and the low interest rates would resolve the challenges faced by the Real Estate Industry.
But the house prices continued to plummet. Banks continued to sell more mortgage-backed securities to people who could hardly finance their mortgage loans. And when insurers failed to cover the credit default swaps purchased by the banks, the banking system came crumbling down. The real Gross Domestic product also declined significantly, the unemployment rate spiked by 6%, people were unable to finance their mortgages, which was followed by thousands of foreclosures. The great recession was indeed a very difficult period for the United States. A decade later, the impacts of the Great Recession of 2008 can still be felt in the US and beyond.
Islam, I., and S. Verick. “The great recession of 2008–09: Causes, consequences and policy responses.” In From the great recession to labour market recovery, pp. 19-52. Palgrave Macmillan, London, 2011.
Reid, Carolina K., Debbie Bocian, Wei Li, and Roberto G. Quercia. “Revisiting the subprime crisis: The dual mortgage market and mortgage defaults by race and ethnicity.” Journal of Urban Affairs 39, no. 4 (2017): 469-487.
Temin, Peter. “Great Depression.” In Banking Crises, pp. 144-153. Palgrave Macmillan, London, 2016.
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