Question

Please write a 3 page paper. CDC style. Comparing the 2008 financial crisis and the great depression.

Answer 1

The commonality between the 2008 financial crisis (Great Recession) and the great depression of 1929:

Huge economic slumps accompanied both. Also, diagnoses and prescriptions were the same. Both catastrophes were laid at the feet of market failure. To correct the alleged market failure associated with the Great Depression, Roosevelt came up with the New Deal.  In short, the prescription was a massive increase in the scope and scale of the government’s reach and involvement in the economy. This type of intrusive response has also followed the Great Recession, ushering in a plethora of government regulations, particularly those that affect banks and financial institutions.

Differences between the 2008 financial crisis (Great Recession) and the great depression of 1929:

Differences explicitly pointed out between the recession and the Great Depression include the facts that over the 79 years between 1929 and 2008, great changes occurred in economic philosophy and policy, the stock market had not fallen as far as it did in 1932 or 1982, the 10-year price-to-earnings ratio of stocks was not as low as in the 1930s or 1980s, inflation-adjusted U.S. housing prices in March 2009 were higher than any time since 1890 (including the housing booms of the 1970s and 1980s), the recession of the early 1930s lasted over three-and-a-half years, and during the 1930s the supply of money (currency plus demand deposits) fell by 25% (where as in 2008 and 2009 the Fed "has taken an ultraloose credit stance"). Furthermore, the unemployment rate in 2008 and early 2009 and the rate at which it rose was comparable to most of the recessions occurring after World War II, and was dwarfed by the 25% unemployment rate peak of the Great Depression.

The diagnoses of and inappropriateness of the prescriptions for the Great Depression and Great Recession:

If one were to apply a monetary approach to national income determination for the Great Depression, one would find that the money supply, broadly measured (M3), plunged by 40% in the 1929-1933 period.

In the Great Recession, one would witness the same pattern as one did in the Great Depression. The money supply, broadly measured (M3), was growing at a year-over-year clip of 17.4% in March of 2008. From that peak rate, it plunged to a negative 6.1% (yr/yr) in June 2010. With this plunge in the money supply, nominal GDP plunged, too. Both inflation and real growth came down hard—not because of market failure, but because of government failure.