Comparative Analysis Between the Great Depression and 2008 Recession

8/6/2019 Comparative Analysis Between the Great Depression and 2008 Recession

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Prepared by:

Piyush Jain 1151

Vinamra Gupta 1168

Nishkarsh Tyagi 1177


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y The Great Depression was a severe worldwideeconomic depression in the decade preceding World

War II. In most countries it started in about 1929 andlasted until the late 1930s or early 1940s. It was the

longest, most widespread, and deepest depression ofthe 20th century. In the 21st century, the GreatDepression is commonly used as an example of how farthe world's economy can decline. The depressionoriginated in the U.S., starting with the fall in stockprices that began around September 4, 1929 andbecame worldwide news with the stock market crashof October 29, 1929 (known as Black Tuesday). Fromthere, it quickly spread to almost every country in the

world.


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y False Sense Of Prosperity

y Global Crisis

y Speculation And Over leverage

y Stock Market Crashy Bank Failures

y Lack Of Available Credit

y

People Stopped Spending Moneyy High Unemployment Rates

y Dust Bowl


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y The financial crisis is linked to reckless lending practices by financialinstitutions and the growing trend of securitization of real estatemortgages in the United States. The US mortgage-backed securities,

which had risks that were hard to assess, were marketed around theworld. A more broad based credit boom fed a global speculative bubblein real estate and equities, which served to reinforce the risky lendingpractices. The precarious financial situation was made more difficult bya sharp increase in oil and food prices. The emergence of Sub-primeloan losses in 2007 began the crisis and exposed other risky loans andover-inflated asset prices. With loan losses mounting and the fall ofLehman Brothers on September 15, 2008, a major panic broke out onthe inter-bank loan market. As share and housing prices declined,many large and well established investment and commercial banks inthe United States and Europe suffered huge losses and even facedbankruptcy, resulting in massive public financial assistance.


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y Stagnating oil prices.

y Continued escalation of prices of staple foods.

y Inflation rates close to 6% and unbridled growth of

foreign debt (13.7 trillion U.S. dollars) and currentaccount deficit (15% of GDP) for 2008 as a result of theabove two points.

y An increase in the rate of unemployment up to 12.5%

at the end of 2008, due to the outbreak of the housingbubble.


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y Stock market :

Price-to-earnings ratios have yet to drop as low as inprevious recessions. The Dow's fall of over 50% in 17months is similar to a 54.7% fall in the GreatDepression, followed by a total drop of 89% over the

next 16 months.


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y Unemployment :

Three years into the Great Depression, unemploymentreached a peak of 25% in the U.S. The United Statesentered into recession in December 2007 and in March2009 unemployment reached 8.5%. In March 2009,

statistician John Williams `argued that measurementchanges implemented over the years make it impossibleto compare the current unemployment rate with thatseen during the Great Depression


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The Great Depression The 2008 Recession

Bank Failures 9096 57

Unemployment 25% 8.5%

Economic Decline -26.5% -3.3%

Biggest Decline in DowJones Industrial Average

-89.2% -53.8%

Change in Prices -25% +0.5%

Emergency spending

programs

1.5% of GDP for 1 year 2.5% of GDP for 2 years

States Response Raise taxes, cut spending Federal Stimulus Plangives fiscal relief to statesto lessen impact of taxincreases

Increase in Money Supply 17% 125%


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Four economic trends heralded a dramatic decline of the U.S. economy:i. Stock prices plummeted. The Dow dropped 40%, from a high of

14,043 in October 2007 to 6,594.44 on March 5, 2009. Between itspeak and its bottom, the Dow dropped over 50% in just 17 months. Itdropped 800 points during intra-day trading on October 6, its

largest one-day drop ever.. These were the largest declines since 1987,and erased $2.5 trillion from global equities.ii. Business credit has dried up. To restore financial stability, Congress

passed an $800 billion bailout to buy back troubled mortgages.Central banks in the U.S. and Europe dropped rates to 5%. TheFederal Reserve doubled its currency swaps with foreign centralbanks in Europe, England and Japan to $620 billion

iii. Housing prices have dropped 28% overall. The median single familyhome price has dropped from $229,000 in June 2007 to $164,800 in

January 2009iv. Oil prices set new records, rising to $144 per barrel in July 2008

before settling at $30 per barrel in December 2008.


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y However, there is only so much monetary policy cando to offset fiscal policy. The incredible size of the U.S.

current account deficit, and the national debt couldpossibly trigger an economic panic that would bedifficult for monetary policy to affect. No one reallyknows, since the current U.S. debt level is

unprecedented. The current thinking is that a GreatDepression could not happen again because the globaleconomy is much more integrated, and all centralbanks are working together to make sure it doesnt.


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y Stock market declines can cause depressions by making it difficult forcompanies to raise the needed funds to grow.

y Lower housing prices and resultant foreclosures totaled at least $1 trillion inlosses to banks, hedge funds and other owners of subprime mortgages on thesecondary market. Since the amount of losses is really unknown, the extent ofthe damage is also unknown, potentially triggering a depression.

y

Business credit is needed for banks to make loans to businesses so they cancontinue to run on a daily basis. Without credit, some businesses have beenforced to shut down, raising unemployment.

y Bank near-failures frightened depositors into taking out their cash. Althoughthe FDIC insures these deposits, many are concerned that this agency will alsorun out of money. Commercial banks depend on consumer deposits to fund

their day-to-day business, as well as make loans.y High oil prices signaled to many people the end of cheap oil, which has been

the foundation of the fast-growing global economy. Others are concerned thatcurrent prices are signaling poor demand that could still lead to depression.


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y Monetary policy caused the Great Depression of 1929. According to Federal ReserveChairman Ben Bernanke, the Great Depression was actually caused by thecontractionary monetary policies of the Fed. During the U.S. recession in thesummer of 1929, the Fed decreased the money supply by 30%. It raised the FedFunds rate to defend the value of the dollar. Without liquidity, banks collapsed,forcing people to remove all funds and stuff them under the mattress, causingeconomic collapse. This time the Fed is keeping needed liquidity in the systemthrough using innovative tools like the Term Auction Facility. In addition, the FDICinsures deposits. Finally, the government is seizing banks before they go bankrupt,and then reselling them to more profitable banks. This often happens on a Friday,so that depositors notice little difference.

y Stock price declines haven't exceeded 11% in one day, and 30% in a year. The kick-offto the Depression was Black Tuesday. By the stock market's close on that day, the

Dow had fallen 30% in just one week.

y OPEC prefers to keep the price of oil under $100 per barrel to keep others fromexploring their own oil reserves and developing alternative fuels. Lower demand foroil, and lower oil prices, has removed this summer's inflationary pressure. Thisallowed the Fed to lower the Fed Funds rate to zero, which helps stimulate theeconomy and avoid a depression.


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y The U.S. economy has been living on borrowed moneyfor a long time, and the economy is experiencing theunwinding of that excess currently. However, itprobably won't be enough to disarm the global

economy's growth, so a worldwide depression isunlikely. Although the U.S. economy may see another

year or two of slow GDP growth, the global economymay not even slow that much, thanks to growth inChina and other emerging markets.

y The best course of action for the US is to cut down ontheir credit and make sure they are living within abalanced budget.


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Thank You

Comparative Analysis Between the Great Depression and 2008 Recession

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