The Great Recession and Great Depression

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Economic History on the United States
Section 1
* The Great Recession and Great Depression
The difference between the Great Recession and the Great Depression is that with the Great Recession, also recognized as the 2008 Recession, has been linked to the subprime mortgage disaster in Western Europe and the United States. These Subprime Mortgages are known as homes that have been given to borrowers who have a history of poor credit. Their home loans are acknowledged as high-risk loans. The Great Depression, in contrast, was an economic depression that rocked the world severely in the 1930s. The industrialized world suffered an economic downtown in history, and it lasted from 1929 to 1939, starting in the United States (Week 9: Great Depression and New Deal). The Great Depression started after a stock market took a crash in October 1929, which had the Wall Street fright, thus wiping out millions of stakeholders (Week 9: Great Depression and New Deal). The similarities between the 2001 Recession and the Great Depression was that both of them were resections on business investments that followed periods of excessive investment. However, many people do not believe that the economy is intended for sustained hardships economically, as witnessed in the era of the Great Depression due to the downturn faced by the stock market.
The Great Recession was an era of universal drop perceived in the national economies globally that happened between the years 2007 and 2009 (Week 9: Great Depression and New Deal). The timing and scale of the Recession were diverse from nation to nation. The credit crunch of the years 2007 and 2008 was the leading cause of the Great Recession, which caused the globe's banking system to run or become short of funds. The result of this was a lack of trust, especially on banks having the confidence to lend people money. Several complicating reasons caused the credit crunch. Firstly, the United States banks were involved in a massive upsurge in sub-prime mortgage credits in 2000-2007. The mortgages were risky though a better deal was presented on illogical exuberance and certainty that houses' prices would keep on increasing. Secondly, the United States mortgage companies engaged in selling these unsafe mortgage packages to several banks across the globe (Week 15: The Obama Years). The agencies related to credit rating ratted them AAA despite the reality of the riskiness of these bundles. Thirdly, around the start of 2005, the interest rates in America went up, and consequently, the homeowners in America started evading payment on these uncertain mortgages. Fourthly, a lot of money was lost within the banking sector of American banks.
Still, then again, the other banks globally later realized the ‘safe’ mortgage packages that they purchased were impractical. Therefore, several banks globally witnessed a considerable decrease in the value and liquidity of their resources. The Great Recession occurred in the year between 2007 and 2009, and in this period, countries experienced a national economic decline (Heilbroner and Singer). This was declared by the international monetary fund as the most severe decline economically and financially. The blend of susceptibilities that did develop in the economic structure caused the Great Recession and along with a series of triggering effects. Homeowners started to abandon their mortgages as the house prices began to fall, and the value held by investment banks on mortgage securities declined, which in turn led to the collapse. Banks were unable to offer funds to businesses; hence, the homeowners had to pay the debts other than them borrowing and expenditure, which was a contributing factor to this Great Recession. The Great Recession brought about a number of effects that were felt in developed countries like North America, Europe, and South America. In contrast, the recently developed countries, China's likes, India suffered less (Week 13: Clinton/Bush I: Neo-Liberalism & Neo-Conservatism).
In contrast, Australia, a highly developed country, was unaffected. Findings stated that the Great Recession was caused by the widespread failures in the regulation of finance, which included the Federal Reserve's incapability of stemming the surge of unsafe mortgages. The excessive borrowing risk by households to put a collision course on the financial systems with the crisis, the financial firms acted recklessly. They took many risks and the ill preparation of the problem by the key policymakers (Week 15: The Obama Years).
Other causes of the Recession involved the credit crunch that resulted in a decline in bank lending because of a liquidity shortage. A drop in confidence in business and consumers was also witnessed, which was caused by financial instability. There was also a negative impact on exports from the worldwide Recession, a drop in houses' value, thus causing adverse effects on wealth. Additionally, an economic sternness compounded the preliminary decline in GDP. The single currency caused more glitches in Europe due to the overvalued exchange rates, not forgetting the high bond yields (Heilbroner and Singer).
The Great Depression is a severe economic decline that occurred during the 1930s and began in the United States. This was the most depressing and most extended period of the 20th century. In the United States of America, it started after a major stock price fall in 1929 and was known as Black Tuesday with the stock market crash (Week 9: Great Depression and New Deal). The gross domestic product fell by 15 percent. The recovery of economies started in the mid of 1930s, but its effects on other countries were felt until the beginning of the Second World War (Week 10: World War II). The impact of the Great Depression was felt in both poor and rich countries; the tax revenue, personal taxes, prices, and profits dropped, and by 50 percent, the international trade fell. In the United States, employment rose by 20 percent, while it rose by 30 percent in other countries. The cities that depended on the heavy industry suffered. The crop prices fell by 60 percent, which was devastating for farming communities, and rural areas as the severe drought had hit America. The effect was also felt on areas that did depend on the primary sector industries like mining. The interest rates also dropped by the mid-1930s. The decline of the United States economy pulled down most countries (Heilbroner and Singer).
The possibility of the occurrence of the Great Depression started after the stock market experienced a negative crash that took place in the month of October 1929 that had Wall Street sent into a fright. Consequently, millions of financiers were negatively affected in the process by facing a wipeout (Week 9: Great Depression and New Deal). After a number of years, that came after saw a drop in consumer spending and investment, which in return caused sudden declines in industrial output and employment as companies laid off more and more workers. The American economy was greatly affected by the Great Depression, whereby industrial production that took place between 1929 and 1933 declined by about 47 percent, the overall domestic product also went down by 30 percent, and the rate of employment surpassed 20 percent. Due to banking fears, 20 percent of banks that existed in 1930 had failed by 1933. Another possible cause of the Great Depression was that the gold standard obligated the central banks to increase the interest rates with the intention of counteracting the trade imbalances with America, causing depressive spending and investment in those countries. Another possible cause was the Smoot-Hawley Tariff Act of 1930 enforced hefty tariffs on several agricultural and industrial goods, paving the way for retaliatory measures aimed at reducing output and resulting in a global trade contract (Week 9: Great Depression and New Deal).
Bringing these two crises to an end needed intervention from financial sectors and unpredicted scenarios like the involvement of the Second World War (Week 10: World War II). The economic Recession does not generally last for a long time as long as expansions do. An average recession has persisted for 15 months since the 1900s, whereas the average growth has been in existence for 48 months. The Great Recession existed for 18 months, was recognized as the most prolonged era of economic decline since the Second World War (Heilbroner and Singer). Ending the Great Recession involved the passing of TARP by the Congress to make it possible for the American treasury to enact a massive bailout program for banks that had money trouble. The plan was to prevent both the global and national economic crisis. The passing of the Economic Stimulus Plan and the ARRA in 2009 was aimed at ending the Recession (Week 15: The Obama Years). The ending of the Great Depression, on the other hand, involved the involvement of the Second World War. As the war commenced, over 12 million Americans joined the military and a similar number of toiled jobs related to defense. These war jobs took care of unemployment in 1939, and most historians indicate that massive sending during the times of war played a part in the ending of the Great Depression (Week 9: Great Depression and New Deal).
Both the Great Recession and depression are the economic drop that was followed afterward with periods of uplifting business investment, booming of financial, and production growth with the regions. They both also had a sharp decline in stock values and business investments in a number of years. Both the Great Depression and the Recession expressed one thing in common; there was production growth that was experienced in the economy in the following years. The completion of the extended period of production improvement was caused by the electric motor's discovery that was paved the way for the bulk manufacture of vehicles among other goods (Week 9: Great Depression and New Deal). In both Recession and the Depression, the business recession was followed by periods of huge investment. The Great Recession and the Great Depression had a mutual thing in common as well; the financial sectors played roles that were prominent. There was a reaction of the stock markets and economy in both the increment and decrement in the economic activities during the 1920s and 1990s (Week 8: The New Era). The diagnosis and prescriptions used in the Great Depression and the Great Recession were similar. They used the same model to determine the national income. It was used to show the significant economies of the world and their relationship between the growth rates in money and money the GDP nominal growth.
The Great Recession economy underwent a modest negative effect on the GDP (gross domestic product). By 6 percent, the unemployment rate rose, and this was far below the rate of unemployment by 25 percent that was experienced in 1933. Consumer spending fell drastically during the Great Depression. Still, for the Great Recession, there was increased spending in the consumer sector and helped offset the weaknesses experienced by the manufacturing industry. The severity experienced by the Great Depression, according to the economists, was due to errors in the policy, the decision to allow the supply of money to contract, and banks to fail, while in the Great Recession, policymakers did intervene to enhance stimulation of the economy aggressively and offer assistance to the financial sector directly (Heilbroner and Singer). In the Great Depression, the GDP fell by 27 percent, the prices fell by 23 percent, and unemployment rose from 3 percent to 25 percent.
In contrast to the Great Recession, the changes in prices, GDP, and unemployment were closer to those that were experienced in the post-war recessions. The real fixed business investment did decline in the year 2001 following the surge of extensive spending in high-tech, the Great Recession the downturn was modest in industrial activity as compared to the Great Depression whereby more than half the industrial production fell. There were drastic losses experienced in the overall stock market in the Great Recession as compared to the Great Depression that was close to eighty percent (Week 9: Great Depression and New Deal). In the Great Depression, there was an extension of the economic disaster beyond the stock market. Most banks failed at the onset of the Great Depression compared to the Great Recession, where they only experienced a few bank failures. The consumer spending kept the economy afloat during the Great Recession while the business investment declined, the consumer spending was able to stay strong, unlike during the Great Depression where the unemployment role remained low and the personal income rose. The Great Recession and the Great Depression also expressed a mutual correspondence on several facts. These were the periods at which the economy dropped (Week 15: The Obama Years), and with the drop, they caused unmatched effects that were experienced by the countries. In both, we have similarities and differences, as discussed above. As from the Great Depression today, the Federal Reserve policymakers are now better in the appreciation of what might have gone erroneous. They can make policy decisions today that will help sustain and grow the economy (Heilbroner and Singer). The economy now has adapted to the modification as a result of the guidelines that were passed following the Great Depression. The federal deposit insurance corporation has provided insurance for every deposit to help prevent bank runs by depositors.
* Government Policies Between 1920 and 1965 and the U.S. Economy
Every policy developed by the government to solve a particular phenomenon always results in either a negative result or a positive result. According to Week 8: The New Era PPT, between the years 1920 and 1965, the country was marked by many problems ranging from the crash that negatively affected the stock market in 1929 to the great economic depression, which lasted for a decade. The country also suffered from the post-world wars, which had resulted in too much damages to the economy (Week 8: The New Era). Henceforth the country had to set out some policy intervention that would help the economy recover to its original state. The government during this period developed many policies. Others failed and resulted in far much worse impacts, while a majority of them succeeds in bringing the economy back to life.
During the period of the New deal in the 1920s, the country was faced with a recession between the year 1920 and 1921, and the current President at the time, Herbert was President he was a very strong defender of Laissez-faire economic policy (Week 8: The New Era). He mainly told the government led by him to do nothing and watch as the country went into Recession. He was a firm believer that the economy will autocorrect or self-regulate by itself. However, his policies later led to the great economic depression (Week 9: Great Depression and New Deal). When the great economic depression began, Hoover did not sit idly, but he tried to control the depression that was worsening at a faster rate. His policies of having the depression controlled included the increased government expenditure, expansion of food production, income policy, settlement policy that was just created, global trade regulations, and excise policy. Hoover increased government spending during his term as compared to his predecessor. The government's spending capacity was practically twice that of 1929 during the period of the great economic depression of 1933 (Heilbroner and Singer).
The budget deficit during this period was too high. Hoover was not into lowering the budget expense. Following the damaging crash on the stock market in 1929, Hoover prolonged the agriculture management by increasing the Federal Farm Board. This board was created earlier to facilitate farmers to receive government funds to their cooperative societies and hence play a significant role in stabilizing the agricultural sector. He loaned farmers all over the country and further subsidizes farm inputs throughout the country to try to keep the prices of products up. I believe this would have been one of the most crucial steps taken in the revival of the economy from the economic crash that the country faced. However, this plan failed terribly as the policy implication by the government to the farmers made them to grow more produce; therefore, products flooded the market, thus resulting in prices declining. As the farmers faced hard economic times, Hoover tried to pay farmers not to grow their produce, therefore trying to reduce the flooded goods in the market (Heilbroner and Singer). On wages, Hoover was of the idea that no salaries should be reduced. Due to inflation, cutting wages to the matching levels of dropping prices would have maintained power purchasing. The outcome was intensifying joblessness fast as companies swiftly understood that they could not employ as many employees when the prices of their output were dropping, and the cost of labor was constant.
Of every government failure experienced during Hoover’s presidential term, his effort to maintain remunerations was the most destructive. He did not believe in Leissez faire concept since he intervened in the private sector. His policy on high salaries was an excellent example of his lack of trust in the market regulating itself. Later in his presidency, Hoover did sign two sections of labor statute that intensely increased government spending in the remunerations and presented a monopoly to unions. This action aimed to shut down nonunion labor, mainly settlers and the whites, and control the taxpayers' cost. A year later, an act Norris La Guardian Act whose five significant prerequisites resulted in ruling out the judges from employing commands to end strikes and enforcing union-free agreements unenforceable in the courts. His intervention in the labor market was further visible in his rejection of the Laissez-faire approach. Hoover also intervened in the immigration and international trade.
On immigration, he formulated policies that resulted in to reduce the number of immigrants during the year 1930. His squabble was that having the immigrants blocked would result in the preservation of jobs available to American citizens. He also arbitrated in the economic decision of the private sector by averting the economic forces of the labor market from organizing wages. Wages were set at a price ceiling. The most common mistake during Hoover's presidency was the signing of the Smooth Hawley tariff in 1930. This law ensured that tariffs were increased on all goods brought in the country, creating the highest tariff in those days (Heilbroner and Singer). The Smooth Hawley policy contributed to the worsening of the world depression. Many countries felt the effects and were mainly opposed to it. This policy was applied, and in the long run, but no change was noticed after its implementation. The economy continued getting worse and worse. Hoover then decided that more drastic policies need to be applied. He then came with the second set of guidelines that were later known as Hoover New deal policies. In the new policies, he proposed that the reconstruction of the finance cooperation to lend tax dollars to banks, a home loan bank to provide the government with funds to the construction sector, the legislation of Hoover's executive order that had blocked immigration, provision of loans that acted as a relief for the unemployed, aid to the ailing banking sector, creating a public work administration that would oversee and organize public works and further grow them, and implementation of antitrust regulations to terminate damaging rivalry.
The revenue tax of 1932 escalated personal revenue tax intensely and brought a variation of excise duty used from the First World War. Hoover's policies may or may not be the right intervention but what we know is that most of the policies that are in use in our modern-day time were a result of Hoover’s policies. His program to try to intervene in the economy was rather unusual for a man who was a pioneer champion of the Leissez faire policy intervention (Heilbroner and Singer). In 1932, the election of Franklin Delano Roosevelt as President was done. During his campaign, he was against the policies that had been implemented by Hoover. Roosevelt, after being elected, President relied on a wide variety of advisors. They patched various programs referred to as the new arrangement whose main aim was to solve the economic problems. Immediately after being elected, he increased government spending. He balanced the regular budget with the debt budget. Roosevelt met with Keynes but did not pay attention to his policy intervention to try to rectify the economy.
He remarked that Keynes was more of a statistician than a political economist he had expected him to be. Keynes's approach to the great economic depression, if it were applied, could have been the best solution to the economy. Keynes had advocated for the government to keep spending so long as the money was in circulation. As soon as President Roosevelt was elected, the fed started spending, and they tended to double income tax. Total income tax as a percentage of GDP rose up. This resulted in reduced consumption, and aggregate demand for goods and services decreased. For the period of the period of the Second World War, government spending increased rapidly due to the increased demand for military machines used for war (Week 10: World War II). This pushed the government into an inflationary gap. In the banking sector, the Great Depression of 1929 to 1933 had destabilized banks. This was a result of the stock market crash of 1929, where many people lost their money. Many people had borrowed from banks, and after the crash, many people defaulted on their loans (Week 9: Great Depression and New Deal). This was a nuisance to banks. A number of banks had put in more of their investments in the stock market, and after the crash, many lost every money they had and were incapable of repaying customers with their deposits. This results in losing public trust in the banking sector.
Hoover had already thought of establishing a bank holiday but restrained from it because he feared generating a panic that would further worsen the situation. Roosevelt decided and took action as soon as his election was done; he shut down every bank until new legislation would protect banks, and he would pass the customers who deposit their cash in them. The banking act that was created mostly by Roosevelt advisers was passed. After the Act was passed, it was now applied into law, and all banks had to follow the rules and regulations. The bill law stated that all banks should work under the supervision of the treasury with federal loans accessible. Three-quarter of the banks were opened while the rest of the banks closed permanently. The public regained trust and returned deposited their money with them once again. Gold followed back to them, and the banking system stabilized within a month. Unemployment during the great economic depression was very bad, reaching a percentage above 25 percent. Job losses were more severe in men as compared to women. The least-skilled workers were the most affected, and this resulted in them falling into a long-term joblessness gap. The relocation that had brought many people to town was now the other way cities were considered very expensive to live in from 1930 to 1933 made attempts to meet the depression by increasing public work projects to employ more people. The federal program launched by president Hoover and significantly developed by President Roosevelt's novel deal used massive projects, such as projects on construction, to make efforts to jump-start the economy and solve the emergency of joblessness. This policy solved the public sector unemployment but posed a difficulty when it did not focus on the vast private sector. Roosevelt developed the relief policy where public workers were provided with a stimulus to revive the economy (Heilbroner and Singer).
As the war continued, the economy functioned under so many different circumstances. However, all these policies failed to bring about the expected economic growth. The real success happened after the Second World War, where unemployment rates dropped to 2 percent compared to the earlier high of 25 percent. Every economic sector grew as the war proceeded. Farm produce was fetching high prices while manufacturing outputs doubled during this time. Learning from the first war that resulted in too much inflation, the Second World War was regulated, and coordination was done so that the nation's productive capabilities of the military was met (Week 10: World War II). After the war came a considerable period of prosperity between the years 1945 to 1973; in this era, the middle class swelled, Gross Domestic Product also increased as production doubled. The distribution of growth was done relatively uniformly amongst the economic classes. A considerable fraction of the growth has resulted from low-income farmworkers' association into jobs in towns that paid better wages. This process of movement was completed in 1960. The years 1942 to 1950 was characterized by increased fertility, and this was due to the delay that was as a result of depression. During the period, farm loans, subsidies, and price support by the government supported the agricultural sector leading to its boom after the period. Air transport was the primary beneficiary of the war as many aircraft were bought. Most consumer companies during the war were converted to produce machinery products, later failed to convert to their original business, and hence decided to adapt to the new norm. The periods 1920 to 1965 were very challenging periods in time, and the governments needed to come up with effective policies that would improve the economy (Week 8: The New Era). Many policies came to existence and were applied, others failed while others succeed, but the most of the policies used during this period are applicable up to the modern date.
* The Korean and Vietnam War and The U.S. Economy
Various macroeconomic pointers have been investigated to determine how they have altered throughout the war eras, for instance; Public debt and levels of fiscal policy, inflation, and income dispersal. The increase of military expenditures can come up with some positive economic importance by the creation of job opportunities and the addition of financial growth and even contributing to the development of technology. This provides multiple impacts, which also extends to more industries. These are mostly recognized positive effects of increased governmental disbursements on military expenditures. By investigating the condition of the economy during the two periods of the conflicts, it can be found out that the advantages of intensified military expenses were overshadowed by longer-term, which is an unexpected negative economic effect.
Korean War
The financing of the Korean War was primarily done by higher rates on taxes, which had the GDP averaging 5.8 percent during 1950 and 1953, and the growth of the GDP climaxing at 11.4 percent in 1951 (Week 12: The Reagan Revolution). Throughout this era, nevertheless, a stall in consumption and venture capital was witnessed. It was a requirement for the government to instigate value and remuneration jurisdictions in reaction to inflation, which had gone up because of the extra inducement caused by government expenditure. Remarkably, the consumption and investment mutually continued increasing after the war; nevertheless, the progress was inferior to the inclination rate before the war. A rise in the stock market was noticed after the war. Based on the report given by a Congressional Research Service in relation to the cost of significant conflicts in the United States, the Korean War cost US$31 billion from 1950 to 1953 1951 (Week 12: The Reagan Revolution). The yearly expenditure size was equal to 14.2 percent of GDP in the final year of the war. This compares to the World War II cost, which is estimate to have been 296 billion dollars in 1945 (US$4,104 Billion in 2011 constant dollars) (Week 10: World War II).
The impacts of the Korean War were not as critical as compared to the Second World War but still altered the growth structure through its funding. The Korean War boosted GDO growth via spending of the government, and these expenses were bankrolled via fiscal policy in contrast with the Second World War that was debt-funded. In Korea, there was an upsurge in the development of GDP for the 1950 to 1953 era (Week 11: Cold War Economy). Consumption and investments were crushed, whereas the general rate of growth was controlled by government expenditure. The President had put all his hopes on taxation and opposed borrowing money from the public to finance the conflic...