An economic depression is an immense economic tragedy that frustrates substantial economic sectors within a country, regional across the world. It is an economic situation where the government cannot finance its operations, characterised by, high unemployment levels, deficits in budgets, industrial strikes and other economic frustrations. The great depression of 1929 to 1941 is as a good example of such an economic situation. During this period, American economy suffered high unemployment rates as millions of workers lost jobs until the government intervened to control the situation, according to Keynes economic ideologies. In December 2007, another global economic decline started that took a sharp downward decline in September 2008. This global recession of 2007 to 2009 spread across the world fast with some countries hit more than others (Grusky).systemic Imbalances, characterised the recession, influenced by the financial crisis of 2007 to 2008.
However, both recessions had relatively similar economic conditions and even similar policies corrected them. Looking first at the causes of the great recession as the worst depression in the history of America, we have to understand that it was not only as a result of one factor, but a combination or external and internal factors or domestic challenges. However, many reasons might have led to the economic challenge, but the research will discuss that economists have prioritised as the major causes.
One of the major causes of the recession was the stock market crash. The US stock market was tremendously positive in the 1920s, and the more it soared the more people were willing to invest in the stock market. Many investors traded on margin, paying only part of the stocks bought, and pay the rest as they sold. That strategy was promising as the stock prices were not showing any signs of decline (McCall). However, in 1929 the market crashed and investors forced to pay up for shares that were not worth anything. To make matters worse, investors had borrowed heavy loans to finance the stock market investment, and on its collapse they were not able to repay the loan. This spread panic even to then banking sector as the financial reserves affected by the high loan defaulters.
Bank failure was another cause of this recession. Many small banks, in the rural areas had given credit to farmers, who did not have prosperity on the 1920s and still, could not repay their loans. The leading banks, which had engaged in loan facilities to European investors expecting to repay after World War 1, faced financial challenges, and forced to withdraw funding foreigners. Consequently, European borrowers decided to default their outstanding loans once US banks stopped lending them (Schröder). As a result, most banks closed business as depositors withdrew their funds out of panic. The panic and closure of these financial institutions almost shut down the US banking system.
Another contribution to the recession was that the majority of the population of America was of the poor. However, the overall economy had soared in 1920s, but that wealth concentrated on relatively few Americans. The American population that lived below the poverty line by 1929 was almost half of the entire population. This population could not make any reasonable demand in the economy which could influence output. Consequently, companies dismissed workers, and with no demand for their products. The inability by the majority to purchase and to pay off their debts created more poverty in the country.
The last reason for the recession was failures in the agricultural sector. This is because even before the depression many farmers in America were already facing challenges. Their production was high, but the prices remained too low in the market such that they could not get enough to repay their borrowed loans.
However, for the 2008 economic crisis resulted from high defaulters of subprime mortgages, which resulted from, the housing bubble bust. In addition, to the challenges, in the housing sector, the exposure to disagreeable mortgages challenged the banking system resulting to financial crisis. From the causes of the two economic periods, we can find that both succeeded periods of extraordinary productivity growth, business investment, and economic booms. Both periods also recorded drastic declines in stock values, real estate and business investments over a period of several years. In addition, both the 2008 recession and the famed depression followed by years of soft high economic productivity. Also, the business investments down turns that followed a period of excessive investment resembled the situation of the 1920s (Rosenberg). For example, before the 2208 recession there was a decline in real fixed business investments. Later, there followed a surge of high spending on products of high technology. However, this decline in the industrial sector activities compared to that experienced during the massive recession when US industrial production went down by more than half.
Moreover, the financial sectors contributed also in both periods. Both the economy and the stock exchange market resulted to both an increase and a decrease of economic activity in 1920s and 2007. According to empirical observations, close to 80 percent of the dramatic losses that happened in the stock market in 2007 is similar to what happened in 1920s. However, some differences happened in the banking sector in both cases; a few banks only decline in 2008, but during the great recession the panic in the banking system was almost paralysing the system with thousand of banks failing. It is undeniable that today’s economy is significantly different from that of 1920s; this means there must have been differences in both situations. Another, difference experienced is that the recession of 200 was not so strong compared to that of the 1920s because of the difference in the economy. There were also differences in terms of the policies adopted after the 2000 recession. This is because for the 2000 recession policy makers used the formers recession as an example in solving the problem.
Furthermore, the economy of the day runs faster because of the applied logistics compared to the earlier days when the economy could run on itself. Before the enormous depression, countries had adopted the classical policies where the economy could control itself automatically without government intervention. However, prior to the recent recession, there was government interventions in the policies adopted to correct the vast depression still existed. There was a lot of government intervention after the massive recession adopted from the Keynesian economist after the classical failed.
Moreover, the economy is more able to adapt to policy changes enacted after the great depression. For example, the Federal Deposit Insurance Corporation (FDIC), which provides insurance on deposits, did not exist before 1920s (Dejuán). Today, this institution it helps banks prevent runs from depositors something, which was common, in the great depression. Also, there is unemployment insurance today which covers individuals once they lose their job.
In conclusion, the situation in both cases is not different, only that there was a replacement between stocks and houses, and lending on margin replaced by mortgages. However, the Keynesian policies employed to end the great recession helped to mitigate the situation in 2008.