Question

what are the differences between the economic crisis of 2007-2009 and previous recessions? Macroeconomics.

Answer 1

Q) what are the differences between the economic crisis of 2007-2009 and previous recessions? Macroeconomics.

Answer- The recession of 2007-2009 was a long and deepest recession.This recession was 18 months long which was almost twice of length of previous war recessions (9.50 months). Therefore, in terms of length, the recession of 2007-2009 is longest when compared with other recessions since the Great Depression.

The 2007-2009 recession was the most severe economic downturn since the Great Depression. However, most research regarding the Great Depression focuses on the entire decade of the 1930s. This paper compares the first two years of the Great Depression and 2007-2009 recession, including the: (1) causes; (2) severity; and (3) policy reactions. When viewed in this manner, it appears that the more recent financial downturn is not “another Great Depression.” While in some respects it was more severe than the Great Depression in year one, the two year data indicates that direct comparisons are not warranted.

U.S. Economy in Recession: Similarities To and Differences From the Past U.S. Economy in Recession: Similarities To and Differences From the Past Abstract Abstract [Excerpt] According to the National Bureau of Economic Research (NBER), the U.S. economy entered a recession in December 2007. It is now the longest recession of the post-World War II era. The recession can be separated into two distinct phases. During the first phase, which lasted for the first half of 2008, the recession was not deep as measured by the decline in gross domestic product (GDP) or the rise in unemployment. It then deepened from the third quarter of 2008 to the first quarter of 2009.

The economy continued to contract slightly in the second quarter of 2009, before beginning to grow in the third quarter. This recession features the largest decline in output, consumption, and investment, and the largest increase in unemployment, of any post-war recession. Previously, the longest and deepest of the post-war recessions were those beginning in 1973 and 1981. Both of those recessions took place in a context of high inflation that made the Federal Reserve (Fed) hesitant to aggressively reduce interest rates to stimulate economic activity. The Fed has not shown a similar reluctance in the current recession, bringing short-term rates down to zero. Although inflation exceeded the Fed’s “comfort zone” in 2007 and 2008, it was not nearly as high as it was in the 1970s or 1980s recessions, and it began decelerating in the second half of 2008. Economists are divided over whether inflation or deflation (falling prices) is a bigger threat going forward. Both the 1973 and 1981 recessions also featured large spikes in oil prices near the beginning of the recession—as did the current one. Oil markets’ disruptions and recessions have gone hand in hand throughout the post-war period.

The previous two recessions (beginning in 1991 and 2001) were unusually mild and brief, but subsequently featured long “jobless recoveries” where growth was sluggish and unemployment continued to rise. Since this recession has been neither brief nor mild (since the third quarter of 2008), it is unclear whether another jobless recovery should be expected. A decline in residential investment (house building) during a recession is not unusual, and it is not uncommon for residential investment to decline more sharply than business investment and to begin declining before the recession. The current contraction in residential investment is unusually severe, however, as indicated by the atypical decline in national house prices. One unique characteristic of the current recession is the severe disruption to financial markets. Financial conditions began to deteriorate in August 2007, but became more severe in September 2008. While financial downturns commonly accompany economic downturns, financial markets have continued to function smoothly in previous recessions.

This difference has led some commentators to instead compare the current recession to the Great Depression. While the onset of both crises bear some similarities, to date, the effects on the broader economy have little in common. In the first year of the Great Depression, GDP fell by almost 9%, prices fell by 2.5%, and unemployment rose from 3.2% to 8.7% (eventually peaking at 24.9%). The change in GDP, prices, and unemployment in the current recession to date has not been significantly different from other deeper post-war recessions. Most economists blame the severity of the Great Depression on policy errors—notably, the decision to allow the money supply to contract and thousands of banks to fail. By contrast, policymakers have aggressively intervened to ease monetary policy and provide direct assistance to the financial sector in the current recession.