From the Great Depression to the Great Recession: How Two Financial Crises Shape America

Introduction

Two defining moments in the economic history of the United States are the 1929 Stock Market Crash and the 2008 Financial Crisis. These two events which took place about 80 years apart have common features relating to their origins, effects, and responses from the government. These crises devastated millions of Americans, affected the world economy, and caused a significant shift in economic policymaking. The reasoning behind these events may have been different but the results in terms of unemployment, poverty, and financial instability were the same, which reshaped the course of America’s economy.

The 1929 Stock Market Crash

The 1929 Stock Market Crash, also known as Black Tuesday, occurred on October 29, 1929. This event marked the start of the Great Depression, one of the most widely regarded devastating periods in economic history. The crash followed a period of unprecedented economic prosperity known as the Roaring Twenties, which was fueled by industrial growth and rapid investment in the stock market. Thus, the boom of the market convinced many Americans to invest in stocks via borrowed funds. This was called buying on margin or purchasing securities on margin with limited collateral. Nonetheless, this bubble of the stock market created by speculation led people to hold inflated values of stocks which was unsustainable.

Toward the end of October 1929, as stock prices started to drop, fear began to set in among the American people who held such investments. Many investors rushed to get rid themselves of their shares. This triggered a historic market crash. By the end of that week, the stock market had already lost around thirty percent of its valuation and the effects of this stock market crash were felt all over the economy. In the years to come, the U.S. experienced a wave of bank defaults, soaring unemployment, and a collapse of industrial output. By the year 1933, close to twenty-five percent of the people were unemployed and the situation of the economy was catastrophic. The increased unemployment caused a steep decline in aggregate output because high levels of structural and cyclical unemployment occurred. The recession brought about serious social and economic problems since millions of Americans were left without savings, housing, or employment.

At first, the government of the U.S. under President Herbert Hoover, pursued a policy of laissez-faire. This is a policy of non-intervention where the self-regulating nature of free markets and the natural stabilization of aggregate supply and demand will cause the market to fix itself. However, this method failed to prevent the downward trend. When President Franklin D. Roosevelt came to power in 1933, he introduced large-scale measures of economic intervention. The policies of Roosevelt’s New Deal provided a system of reforms in the financial sectors, national employment projects, and social security. The New Deal aimed to provide relief and prevent future economic disasters. At the same time, the establishment of the Federal Deposit Insurance Corporation (FDIC) contributed to the increase of public confidence in the banking sector by covering the repayment of bank deposit amounts.

An image depicting a newspaper with the headline of the stocks crashing and the panic occurring in the USA

The 2008 Financial Crisis

Fast forward to 2008, and the world witnessed another financial disaster. However, this time, it was fueled by the collapse of the housing bubble. The 2008 Financial Crisis was caused by the subprime mortgage crisis. The subprime mortgage crisis occurred when a sudden increase in the price of houses made financial institutions lend money to ordinary citizens without assessing how likely it was that the loan would eventually be repaid. These loans were globally distributed as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) which increased risks. For a long time, banks and other financial companies sought higher returns and took excessive risks due to deregulation and a belief in the fact that prices for housing prices would always trend in an upward direction due to ever-increasing demand.

The housing market began cooling in 2006 and home prices began to fall. The US homeowners defaulted on their mortgages, and the value of mortgage-backed securities decreased. The structure of these investments led to panic in international financial markets. The collapse of most of the financial institutions, for instance, Lehman Brothers spread panic throughout the US economy. This, in turn, forced the Bush Administration to bail out Bear Stearns and AIG insurance companies while others were filing for bankruptcy. Economies across the globe went into recession as the stock market crashed. The United States recorded an unemployment rate of 10% while millions of Americans found themselves having their home foreclosed.

President George W. Bush and Barack Obama implemented bold monetary policies along with structural reforms designed to bring about a drastic turnaround. The Federal Reserve decreased interest rates to nearly zero and the $700 billion Troubled Asset Relief Program (TARP) was passed by President George W. Bush while the government also provided massive liquidity to the baking system. Every business model was under tremendous stress, jobs were lost at catastrophic levels and, the majority of economies observed their central banks lowering interest rates to stimulate growth including the creation of stimulus packages as seen in America. Without the additional response of the American Recovery and Reinvestment Act in 2009, a $787 billion economic stimulus package aimed at creating jobs and stimulating economic growth, passed by President Barack Obama, the jobs lost would have led to much harder consequences globally, with economies not recovering for decades and some never truly recovering.

Image displaying how American people were upset over the fact that banks were bailed out while they were forced to endure the hardships brought on by the subprime mortgage crisis.

Key Comparisons

Both the 1929 Stock Market Crash and the 2008 Financial Crisis were triggered by unsustainable financial practices and speculative bubbles regarding industrial growth. In 1929, margin trading was at its peak and the stock market was overinflated which guaranteed a market collapse when investors rushed to sell. In 2008, the real estate market was overinflated with banks lending to anyone with even a slight amount of credibility and packaging low-quality loans in unrealistic repayment structures. Both events resulted in widespread unemployment and caused millions of people to lose their homes and savings.

Nonetheless, there were differing responses from the respective governments. Unlike during the Great Depression when no one bothered to spring into action, during the 2008 economic downturn, we saw immediate government action in the form of bailouts and stimulus packages. Economically, the Great Depression was followed by the New Deal which provided a lot of long-term measures like the formation of the FDIC while after the 2008 Financial Crisis, the Dodd-Frank Act was passed to limit risky lending and improve the transparency of the financial system.

Conclusion

Even though the Stock Market Crash in 1929 and the Financial Crisis in 2008 are completely different events, the patterns they followed were remarkably similar. Both educated the nation and the world regarding the dangers of financial speculation, lack of regulation, and economic bubbles. Both crises proved to be devastating to the American population as they led to mass unemployment, poverty, and a lack of hope in the economy across the nation. Additionally, in both cases, the responses that were adopted by the US government helped to create the present-day economic policies and regulations to prevent any financial disasters. The significance of understanding these events and the factors that led to them cannot be understated as it is pertinent for dealing with the future economic hardships that might arise.

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