Comparing Current Economic Crisis And Great Depression Economics Essay
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Published: Mon, 5 Dec 2016
Comparing current economic crisis and Great Depression. The current U.S economic crisis that begun August 2007 has plunged the country into a very dangerous phase in the U.S economic performance (Hilsenrath and Paletta, 4). The great decline in stock market which reduced spending and wealth among people resembles to the great economic depression (Katz, 10). The Great Depression was an economic recession that eroded stock market wealth and eventually spilled to other sectors of the economy (Hilsenrath and Paletta, 4). During the Great Depression, it has been recorded that Dow-gold ratio reduced substantially to a lower of 47 percent, most similar to the 42 percent experienced in the current crisis. The enraging crisis also foresaw crippling of most financial institutions due to bad loans and many banks had to freeze lending from 1929. There has been similar experience in the current crisis as the credit markets are on verge of collapsing. In 2008, sum credit in financial institutions has reduced by more than 250 percent while bad debt level has gone below 350 percent market (Waggoner, 1).
The two crisis have shown similarities when comparing the trends in real estate. Like in the 1929 Great Depression, there has been a great overvaluation of the real estate. Problems in real estate have been the main factors contributing to the current crisis (Delong, 2).
Under the global monetary system, dollar is converted with gold which means all the over currencies are only converted to gold or the Pound. However, this has become completely different since the dollar which is converted to gold has not been able to meet monetary conditions for conversion to gold standard which has destabilized world monetary system (Petrov, 2). Government response to the crisis is similar. In the current crisis, the United States government has signed a multibillion economic stimulus package totaling to $700 billion. This was a similar strategy which was taken in the Great Depression but in both economic crises, the economic stimulus package has not lived to its expectations (Stewart, 2).
It is still acceptable to say that the current economic crisis resembles the great economic depression of 1929 because the high rates of unemployment that was witnessed during the depression has also affected the United State economy where many people have remained jobless and retrenchment rates have been at its peak. The current rate of unemployment stands at 6.1 percent which is even below the 1992 rate which was 7.8 percent. Similarly those still employed are under fear of loosing there jobs people anytime if efforts towards recovery does not succeed (Waggoner, 3). It is said that unemployment rate hit 10 % for the past two years. Research shows that the job crisis in America reached a point where both the underemployed and unemployed stopped searching for jobs and the rate of those looking for full time job but they could only get part time job reached 17.4 %. The rates of job crisis in America is said to be the highest figures in the world and continuity of such trends in America will certainly change the new generation and the life course (peck, 2).
The economic crisis in America forced president Franklin D. Roosevelt and the congress of the time to create FDIC with an aim of providing the federal state guarantee of deposits so the inception of FDIC in America granted people with certain amount of money guarantee of their money and those who deposited their finance with FDIC were very certain that their money was safe even if bank failure occurs (FDIC, 1).
How U.S economic crisis is different from the great depression
What need to be reflected first is that the 1929 occurrences were termed as a depression while the current situation in America is a recession. Scholars have said that the current economic crisis in United States is unlikely to culminate into the 1929 great economic depression. Some of the notable differences between the two include the following:
During the economic depression the dollar was devalued relative to gold. Currently, there is absence of gold standard that serves as a restriction to the amount of money supply that can be expanded since the gold standard was abolished in 1971 thereby making the restriction of the dollar being tied to gold standards a nightmare in today world (Krugman, 3).
During Great Depression, America economy was not ridden by bad debts as it is today. Currently, U.S economy has introduced credit cards that never existed in 1929. Similarly national debt and deficits in money available for spending was significantly lower than it is today where America’s debt is largely owned by foreigners who may easily devalue the dollar through selling dollar reserves and treasury bonds a decision that may lead to an international war.
Although the economic crisis has caused pain in America economy for instance collapse in financial market, overvaluation of real estate, fall in energy prices, collapse of industrial centers and existence of recession in many sectors of the economy there are hopes that some cities will recover much better than before the occurrence of financial crisis since there are almost fifteen areas in the economy that are still expanding such as oil and natural resources (Florida, 4).
Similarities between japans crisis of 1990s and the U.S Economic crisis
The financial market stress that hit American economy resembles Japanese market crisis after 1997. It’s recorded that various banking institutions and securities greatly affected financial markets thereby leading to increased crisis in the banking system of the two countries. Likewise asset market was greatly hit with no indications of bottoming out which is similar to American real estate market. It is also indicated that great losses were noted in the financial market where cases of bad loans were prevalent and this is said to have held the recovery of Japan economy (IMF, 1).
In both economies, the economic crisis led to decline in consumer’s consumption habits since prices for goods were unaffordable thereby making consumers to minimize their spending potential with a view that in the near future prices will fall due to decline in demand. The period between 1980, Japanese monetary authorities flooded markets with liquidity so as to enhance the business to cope up with the rising value of Japanese yen. The excessive flow of money in the economy by 1990s led to immediate increase in the market value of equities and land since many investors directed their finances in real estate business (Posen, 6).
Differences between japans crisis of 1990s and the U.S Economic crisis.
Although the crisis in America and Japan were spearheaded by weak regulation and easy credit, policy makers argue that Japanese crisis looked larger than the American one because Japanese crisis stretched and affected the asset prices which were believed to be three to four times bigger than the American (Peck, 2). The banking crisis in the two economies shows that the American crisis was quite uncharacteristic since it shows household profligacy whereas the Japanese banking crisis comprised borrowing of finances by firms. In Japan for instance the sum bank losses on bad debts was almost 20% of the gross domestic product between 1993 to 2005 (Dick, 2008).
Trends shows that policy response to the crisis in America were quicker and this made America move into the second of and manageable fiscal stimulus package. The U.S took quicker steps to revive the banks through the use of public funds within one year while Japan took eight years to recapitalize its banking systems (Mikitini, 2000).
The lesson learnt from Japanese economic crisis is that the buying habits of consumers changes negatively when the rate of inflation is very high thus consumption rate of consumers decreases because they anticipate that prices of the products and services will fall in the near future where the will be able to buy at low prices and make some savings (Delong, 8)..
It can be said that current governments came up with a number of policies to counter the effects of economic crisis for instance in America the federal reserve system kept the interest rates very low and expanded supply of money in the economy. Similarly many governments adopted the policy of reducing payments on housing loans. The strategy by federal government to inject more money into banking system in 2004 to 2006 helped increase the targeted federal money to more than the normal rate of 5% which reduced demand for houses thus fall in prices for houses hence solving the bubbles in the real estate management. Federal government also began bailing companies and banks that were collapsing such as GM, AIG and Chrysler and this helped to stimulate recovery of many banks and companies (Gene, 3).
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