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The Great Depression was an economic slump that occurred in the United States between 1929 and 1933. The period started with a huge drop in stock indices and it is considered the longest economic downturn of the 20th century that affected the entire world. Although the upturn began in 1933 in most nations globally, many historians believe that the period finally came to an end with the start of World War II as government spending on war enhanced the recuperation process. The Great Recession, on the other hand, happened between 2007 and 2009. The crisis was precipitated by the collapse of the housing bubble during 2005-2006 (Bianchi, 2020). In the 1990s, the U.S government started pushing homeownership even for uncreditworthy individuals. Mortgage-backed securities became “toxic” especially when the housing market took a mishap during the period, and many financial institutions were on the verge of collapse. The desire of the government to bail out financial institutions created instability and uncertainty, and this may have widened the recession. Both the Great Depression and the Great Recession affected the U.S economy and attracted Fed’s response.
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Effects of the Great Depression and Great Recession
The Great Depression and Great Recession followed periods of excellent economic growth. The two events led to economic downturns and are believed to be the greatest economic catastrophes experienced in the United States in the last century. Furthermore, the events were followed by impressive government involvement in initiating many policies and regulations (Bianchi, 2020). Massive federal spending contributed a lot to the two events. Presidents Obama and Roosevelt responded in a similar fashion to the disasters. For instance, the head of state resorted to massive spending when it was evident that the nation had to cut spending. Roosevelt broadened spending on public works and targeted huge subsidies to various interest groups. Obama also targeted spending on interest groups. He supported the expensive “jobs bill” that would transfer cash into significant congressional regions. Furthermore, by campaigning for cap-and-trade law, the federal debt increased to huge amounts. During Roosevelt’s first term, the federal debt doubled. The two events slowed the U.S industries and economy. Unemployment skyrocketed and people struggled to make a living.
The two events greatly impacted the Gross Domestic Product of the United States and the world. During the Great Depression, for instance, the U.S economy witnessed a 30% slump (Temin, 2010). In the same period, the global GDP recorded 27%, the highest in history. The Great Recession, on the other hand, saw the U.S economy contracting by 4%. The global GDP during the same period decreased by 5%. Both events led to a rise in tax rates. The tax hikes under President Obama are planned for the future; a rise in capital gain tax, income tax, and estate tax.
Strategies of Reduction
During the Great Depression, the Fed increased the interest rates to restrain guesswork in the securities market. To reduce the risk of the reduction in the general level of prices, the Fed made a large-scale purchase of Treasury bonds in two rounds of quantitative composure (Lim & Sng, 2011). The move was meant to restore market stability and promise hope. However, during the Great Recession, the Fed lowered the interest rates and injected a huge amount of liquidity into the economy. Also, the Fed acted to starve off the collapse of the banking sector by decreasing the federal funds rate to nearly 0% and initiating schemes that lent money to financial institutions on a transitory basis.
The unemployment rate between the two events shows the differences. Between 1929 and 1933, the number of unemployed individuals in the United States grew exponentially. By 1933, the number of unemployed was reported to be 25%. The percentage represents the largest number of unemployed Americans in U.S history. During the Great Recession, the number of unemployed Americans stood at 10%. The difference between the two events is evident in severity. The Great Depression had far-worse consequences for the United States and the world at large as compared to the Great Recession (Vanek, 2011). Protectionism worsened the recession, compelling the government to employ both short and long-term measures to ensure instant change.
The cause of the Great Depression and Great Recession lies with the actions of the Fed. During the Great Depression, for instance, the Federal Reserve raised interest rates to stop the resulting crash. This helped stifle off investments. Spending failure also led to the two events. In the 1930s, the unemployment rate in the United States declined. However, recovery never happened. Presidents Obama and Roosevelt could not spend their way out of the crises. Ideally, every money that is for government spending must be raised through taxation. If the right taxation scheme is not properly initiated, disaster awaits. The crises stress the role of economic models and ideas in public policy. Also, the events argue that the gold-standard mentality is still critical in the current world. The two phenomena illuminated the policy being made today, bringing to light how best the nation can protect its citizens during tough times.
- Bianchi, F. (2020). The great depression and the great recession: A view from financial markets. Journal of Monetary Economics, 114, 240-261.
- Lim, C. Y., & Sng, H. Y. (2011). The great depression, the great recession, and the next crisis. World Economics, 12(3), 163-190.
- Temin, P. (2010). The great recession & the great depression. Daedalus, 139(4), 115-124.
- Vanek, J. (2011). From the great depression to the great recession. International Review of Economics & Finance, 20(2), 131-134.