Forgot? Register!

Similarities between the Great Depression and the 2008 Financial Crisis

author
how we think
date
12-05-24 21:10
hit
3,837
Similarities between the Great Depression and the 2008 Financial Crisis
Minha Kim
St. Michael’s University School, BC, Canada


Abstract
The idea behind this essay is to illustrate the similarities between two catastrophic economic events that have claimed tens of millions of jobs worldwide. There are a surprising number of similarities between these two regressive events. As history often repeats itself, it is important to look at the factors that contributed to these collapses and consider effective governmental policies to reverse any economic slowdown.
On October 29, 1929, the United States experienced the worst stock market crash in history. The price of stocks dropped drastically and many investors went bankrupt in a matter of days (Wilkes, 2006). The 2008 stock market crash bears heavily on the minds and the wallets of people today. The tragic cycle of history never seems to end. The 1929 Wall Street Crash and the economic depression of the 1930s bear strong resemblance to the 2008 Crash and the current economic recession in terms of their initial cause and the subsequent consequences for the society.
The causes of the Wall Street Crash and the 2008 Crash are strikingly similar. In the 1920s, the stock market prospered with a speculation boom which led millions of Americans to invest in stocks. The volatile economy, suffering farmers and decreased value of wheat all led people to depend on the stock market. Citizens even borrowed money to buy stocks because they thought their investment would eventually multiply and produce a profit. The rising prices of shares encouraged more people to invest. As speculation regarding the rising shares’ profits increased, so did sales, creating an economic bubble (Wilkes, 2006). With regard to the 1929 crash, Andrew W. Mellon, Secretary of Treasury, stated, “The high tide of prosperity will continue” (Woods, 2009). People overestimated the “real potential earnings of the share prices,” and eventually the price of stocks simply dropped as the economic bubble burst. In 2008, the vulnerable American financial system, housing bubble, and excessive supply of goods caused the crash.
The price of oil and food, for example, increased so dramatically that many people suffered and started to find alternative ways to reduce their financial problems. The housing bubble, one of the main causes of the crash, was created by people who were unable to pay off their mortgages. Wallison (2008) stated, “U.S. housing policies are the root cause of the current financial crisis. Other players—greedy investment bankers; foolish investors; irresponsible housing speculators; shortsighted homeowners; and predatory mortgage brokers, lenders, and borrowers—all played a part.” The over investment and inflated prices which resulted in a drastic decrease in prices are basically the major causes of both the 1929 and 2008 stock market crashes. People wanted to get rich easily and overestimated the power of stocks and the real estate market.
After the price of stocks reached its peak on September 3, 1929, the stock market started to fall sharply and constantly. By Black Tuesday, stock prices had plummeted dramatically. It was a day of chaos. “Panic selling” set in, and about 12,894,650 shares were traded in one day as people tried to sell their shares before they became worthless.
The situation of the 2008 Crash was not any better than the disaster on the Wall Street in 1929. Many people rushed to dive into the real estate market because subprime mortgages and low interest rates encouraged people to buy. They were expecting that the value of their homes would rise. The Economist (2005) said, “The worldwide rise in house prices is the biggest bubble in history.” In 2007, the housing bubble burst and prices fell drastically; people who bought houses were unable to pay back the loans they had taken out and banks closed down. The crash was followed by less demand, which propelled the economic recession. Both the 1929 and the 2008 crashes underwent fluctuations and were accelerated by a vulnerable economy.
The consequences of the two disastrous crashes are also similar in nature. The losses from both the Wall Street Crashes were unimaginable. In the ten years following the first Crash nearly 13 million Americans lost their jobs, with 12,000 jobs lost every single day. Almost 20,000 companies went bankrupt, including 1,616 banks. In 1932, 23,000 Americans committed suicide. People suffered from poverty; an unemployed man in Minnesota moaned, “You can get pretty discouraged and your soles can get pretty thin after you’ve been job hunting a couple of months.” The crash created a time of economic and social adversity—the Great Depression. People who lost their jobs suffered from poverty, hunger, and lack of respect and self-confidence (Wansell, 2008).
The current economic recession seems to be replaying the Great Depression of the 1930s. When high oil prices, high food prices, and a housing bubble caused the crisis, many banks and companies suffered substantial losses and went bankrupt. Export-based economies are suffering severe declines in industrial production. Similar to the Great Depression in the 1930s, the current unemployment rate is also very high; the International Labor Organization reported that about “20 million jobs will have been lost by the end of 2009, bringing world unemployment above 200 million for the first time” (Juchau, 2008). It is obvious that the two crashes have had many similar consequences; however, the current economic recession is not, yet, so bad as the Great Depression.
The recession might continue, but a “depression” will probably not develop as the current economy has the power to prevent a severe drop in real estate values. Americans are reminded that the economy might not revive itself in the near future because of the damaged world financial system; however, a laissez-faire approach will not work in solving today’s economic recession. Similar to what President Roosevelt did to reduce unemployment and economic depression through government intervention, the government is expected to make every effort to combat the current economic downturn.
The overall similarities of the two events have been noted, but it is not yet known if history will repeat itself. The next few years will tell us if the end results of the crash of 2008 will differ greatly from that in the 1929. Krugman (2008) asserts that financial reform should be made only after the economy is stimulated through bailouts, government spending and control of interest rates. We will be able to prevent another great depression if we act quickly, otherwise we might have to face another great depression.


References

American History quotes Stock Market Crash. Retrieved on November 12, 2009 from
http://en.wikiquote.org/wiki/Transwiki:American_History_quotes_Stock_Market_Crash
The Economist (2005). “The global housing boom” The Economist. Retrieved on November 12, 2009 from http://fac.comtech.depaul.edu/jwoo1/courses/globa-house.htm
Juchau, L. & Flanagan, H. (2008). Financial crisis to cost 20 mn jobs: UN (2008). Retrieved on November 12, 2009, from
http://uk.reuters.com/article/idUKTRE49J4Y620081020
Krugman, P. (2008). The Return of Depression Economic and crisis. New York: Norton.
Wallison, P. (2008). Cause and effect: government policies and financial crisis. AEI online. Retrieved December 8, 2009 from http://www.aei.org/outlook/29015
Wansell, G.(2008) So what can we learn from the Crash of 1929 to avoid a 21st Century Great Depression? Mail Online, Retrieved December 8, 2009, from
http://www.dailymail.co.uk/news/article-1057303/So-learn-Crash-1929-avoid-21st-Century-Great-Depression.html
Wilkes, T. (2006). Wall Street Crash of 1929. Trading Day. Retrieved on November 11, 2009 from
http://www.tradingday.com/basics/wall_street_crash_of_1929.html
Wood, T. (2009). Don’t Buy the Hype, Financial Sense. Retrieved November 11, 2009 from
http://www.financialsense.com/Market/wood/2009/0109.html