The Great Depression and Financial Crises

This assignment provides an extensive analysis of the Great Depression, including its causes, effects, and comparison with the Great Recession. It also explores government intervention in financial crises, real estate prices, and employment during the Great Depression. References are taken from a variety of sources, including books, journals, and online articles, to provide a comprehensive understanding of this significant economic event.

Global Financial Crisis
(GFC)

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Other Examples of GFC..............................................................................................................1
Discussing the causes of financial crisis.....................................................................................2
Discuss Could GFC be repeated.................................................................................................3
GFC and Australia.......................................................................................................................3
GFC and UK...............................................................................................................................4
GFC and USA.............................................................................................................................4
Identification of the actual or proposed reforms.........................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
Depression is the long and very severe recession within any economy of the world and if
that recession affect the whole world then that is known as Global Financial Crisis. Recession is
the phenomenon which is regarded as the economic downtime or fall of GDP of any country
during two successive quarters. In this recession all the industrial activities including trade and
finance work is been decreased or reduced and then there is credit crunch in economy. Whole
world faced the Global Financial Crisis of 1929 which lasted till 1939 this is till the time
regarded as the worst times which were faced by people of USA which then widespread to all
over the globe. This is in general terms regarded to as Great Depression of 1929 and the best
example of till what extent economies of world could be destroyed financially. This was mainly
caused because of major fall of stock market prices which began on 4th September 1929.
Other Examples of GFC
The Great Depression of 1929 is so far the best example of financial crisis which world
faced in 20th Century but in the year 2007 the same kind of crisis was encounter (Ohanian,
2017). After 1929 the year 2007-08 crisis was the 2nd most devastating financial loss as
considered by many economists of world. This depression lasted till 2012 and this was also
originated in USA which is the largest economy of world. The measure and timing of the
economic crisis in all countries vary from each other but the impact was still the same as other
countries. The major cause behind this recession was the largely declining prices of real estate
market in America and its impact was more than 1930 as concluded by International Monetary
Fund. Thus resulting into lack and scarcity of valuable assets and the cascading the effects on
financial institution and banking sector began to collapse down. The effect an impact of this
recession was not evenly spread ot all the nations of world largely particulate in developed
economies like North America and European countries. However, the developing nation like that
of China and India was grew during this period.
This lead to sub prime mortgage crisis which was an emergency situation within global
leader like USA and this greatly contributed to the recession stage of 2007-09 (Knüpfer,
Rantapuska and Sarvimäki, 2017). The prices of house and real estate within the USA began
increasing in starting of 2006 which declined in 2006-07 and then came to its lowest in 2012 this
was known as housing bubble of USA. Then this resulted into delinquent mortgage and lenders
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of houses began to foreclose the loan which lead to devaluation of housing securities. This
devaluation formed the path of declining investments of public in residential property, thus
reduction in spending of public and eventually lowering down overall investments expenditure.
There was the contraction in GDP of America and thus lead to fall down of international trade
and prices of goods and services, we well as increase in unemployment. Banking and financial
sector of USA witnessed the great down fall of investments, lending and facing bankruptcy
(Edwards, 2017). All the loans, over valued assets like that of real estate was exposed at the time
of emergency situation of sub prime loan loss in 2007 and this resulted in down fall of Lehman
Brothers.
Discussing the causes of financial crisis.
The financial crisis which began in early 2007 and ended till 2012 was having many
causes behind it which marked the stone of 2nd global crisis of world (The Great Recession –
Causes and Effects of the 2008-2009, 2017). All the consumer and household borrowing which
increased in early 2006 marked the main cause of crisis in 2007-08 thus banks began to give
cheap credit to public. The other caused of crises were:
Market instability- this was banking sector of USA was trying to create more line of credit
securities and then distributing it within households. The flow of money within economy was
began to parched and then economic growth of US was slowed down. Whole economy and
classes like that of individuals, business and financial institutions were hardly hitched by this
under valued the price of assets.
Declining of housing market- in the beginning of 2006 the value of house in market of USA
was at its highest which declined and came to its lowest in 2007-12. This was because banks
were easily giving credit to public, they were thus made money available very easily but after
that borrowers were not able to pay credit (The Great Recession – Causes and Effects of the
2008-2009, 2017). Thus, eventually real estate market of USA declined which effected others as
well.
Credit creation- the banks of USA were opening line of credit for public and making Americans
more and more greedy to expand the business and in order to create jobs (Hansen and Ziebarth,
2017). Many people took housing loan whether they were in need or not but they thought this as
a good chance to invest their surplus money.
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Discuss Could GFC be repeated.
There are number of unemployed labour force who are whether working as a part-time
job or stopped looking for one and thus rising of unemployment rate to 4%. This is the sign of re-
occurrence of depression in USA in coming years (Could the Great Depression Happen Again?
2017). In the year 2016 the stock market was at its lowest after the recession of 2008 which
caused trillions of loss to investors in same year and many countries faced recession again. In
2015 about 70% of American investors lost their money, 1000 hedge funds were sold out and
junk bonds were crashed down.
This showed that USA and world is heading towards the another recession period which
could be worse than that of 1929 or 2007. The price of oil were also raised to $50 per barrel of
oil which before 18 months in 2016 January was on its 13 years lowest at $26.55 per barrel
(Hendrickson, 2017). Federal Reserve of USA was using the expansionary tool of monetary
policy against financial crisis and for this they bought $4 trillion of US debts. Whole of the USA
economy from many years have been leaving on borrowed money and this scared both business
and individual.
GFC and Australia
As economy of Australia also was one of the witness of Great Depression of 2008 which
began in 4th quarter of 2008 and ended at end of 2009. But country was not that much affected by
the recession as government of Australia is having very smart policy which somehow has
managed to dodge the recession from 25 years. This began to mark the ending of this happy and
fortunate period of Australia in year 2008 and this lasted for just a year (Hausman, Rhode and
Wieland, 2017). Australia suffered the financial crisis during the period of Great Depression
1929 which lead to high unemployment rate, poverty, deflation, lowering down of profits and
personal or professional opportunities.
There was no demand of wool and wheat in international market of which Australia was
premium exporter. In 1932 there were almost 30% of the population who were under the phase
of unemployment and in 1929-31 GDP declined ot 10%. This was all because Wall Street totally
crashed on 24th October 1929 which was marked as Black Thursday in history of stock exchange
market (Carta and Mausel, 2017). The Australian Pound was devalued in terms of UK sterling in
the emergency scale of 1929 and government set rate at £1 AUS= 16 shilling of sterling. Coal
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miners of Australia were also affected and this resulted in downfall of many other sectors of
Australia.
GFC and UK
United Kingdom was affected by recession of 2008 which caused a shrunk in the
economy and this bankrupted Woolworth and Waterford Wedgwood. UK also faced job cuts and
high industrial demand which was not able to meet up with unskilled labours (Timeline: UK
recession, 2017). There was also fall in the demand of electricity within UK because of factories
were closed down. Banking sector was the most affected areas of economy and Royal Bank of
Scotland marked a loss of about £28 billion. With this government of UK began to give the
financial assistance to financial sectors in order ot help them out. In February 2008 there were
about 2500 workers who lost their jobs because of the recession and British Airways also started
freezing out the salaries of its workers. The insolvency ratio was increasing in August 2008 and
almost 33000 people declared their insolvency. Months after months the unemployment in UK
was continued to be there in markets and this was causing the decreased in GDP in 2009.
GFC and USA
The high unemployment rate in USA remained till end of 2012 and this also lower down
confidence of consumer and declining in price and value of house (Benmelech, Frydman and
Papanikolaou, 2017). The people and banks were facing bankruptcy, foreclosure of housing loan
continued. In 2011 there was still signs of unemployment which made the people thought that
they were still under the period of great depression. This was because of the fact that inflation
was continued to hit the US market, all price of basic goods as well as that of petroleum and
many of them under the debt of housing loan. They began to leave their houses as was running
short of finance and any financial help without paying off their dues. Real GDP of USA was
falling down in 3rd quarter of 2008 and this was only at 4.5% in 2013. Rate of unemployment in
2008 was as high to 10% and gradually declined at 7.3% in 2013. Price of houses were
decreasing on the average of 30% from 2006 to 2009 and this 30% was still there in 2013 as
well.
Identification of the actual or proposed reforms.
The Great Depression was a phase which shock world with its causes and after effects
which were there till 3-4 years after happing of event (Government’s Role in the Financial Crisis,
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2018). This marked intervention of governments of all the nations who were witnessed so that
they are able to control recession and prevent its public from a major downfall. Government very
well regulated the banking and financial sector by introducing both fiscal and monetary policies
which thereafter reduced financial risk and stimulating economies. Then many affected nations
and their government decided that they need ot review their plans and policies which they have
earlier announced.
The government of USA took many strong steps in order to save this devastating effects
of depression which also included the steps of Federal Reserves, Treasury and Securities and
Exchange commission in 2008. These all were done so that government could intervene in
financial crises they were:
 In order ot insures investments in USA the Treasury decided an investment in money
market mutual funds of about $50 billion.
 In reaction of the mortgage crisis Securities and Exchange commission announced that
they will be terminating short selling of 799 financial shares and will also be taking steps
inlue of naked short selling.
Other governments of countries also took major steps to abolish effect of recession in their
countries like that of:
 Chinese government cut down the rate of interest of in 2008 which was for the first time.
 Government of Indonesia decided to cut down the interest rate of overnight at which
banks were taking credit from Central bank to 10.25% (Ohanian, 2017).
 About $1.5 billion was invested by Reserve Bank of Australia into its banking sector
while Reserve Bank of India also invested $1.32 billion through one of their refinance
operation.
CONCLUSION
It is been concluded that Great Depression of both 1929 and that of 2007 heavily effected
the major economies of world. USA which is always regarded to as world leader is also been the
main source of depression in world and it only then helped others from coming out of that worse
period. It is also estimated that recession will be hitting again to world very soon as there are
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many signs of this. It was also seen in both cases that government intervention in the financial
crisis so that they can eradicate the effects is very much important. From the report it is also
concluded that prices of real estate and down fall of Wall street was the major causes which lead
ot economic and financial crisis.
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REFERENCES
Books and Journals:
Benmelech, E., Frydman, C. and Papanikolaou, D., 2017. Financial Frictions and Employment
during the Great Depression (No. w23216). National Bureau of Economic Research.
Carta, M.G., and Mausel, G., 2017. Depression in Sardinian immigrants in Argentina and
residents in Sardinia at the time of the Argentinian default (2001) and the Great Recession
in Italy (2015). BMC psychiatry. 17(1). p.59.
Edwards, S., 2017. The London Monetary and Economic Conference of 1933 and the end of
the Great Depression. Open Economies Review. pp.1-29.
Hansen, M.E. and Ziebarth, N.L., 2017. Credit relationships and business bankruptcy during
the Great Depression. American Economic Journal: Macroeconomics. 9(2). pp.228-255.
Hausman, J.K., Rhode, P.W. and Wieland, J.F., 2017. Recovery from the Great Depression:
The farm channel in Spring 1933 (No. w23172). National Bureau of Economic Research.
Hendrickson, J., 2017. Robert L. Hetzel (ed): The great recession: Market failure or policy
failure?. The Review of Austrian Economics. 30(2). pp.251-254.
Knüpfer, S., Rantapuska, E. and Sarvimäki, M., 2017. Formative experiences and portfolio
choice: Evidence from the Finnish great depression. The Journal of Finance. 72(1).
pp.133-166.
Ohanian, L.E., 2017. The Great Recession in the Shadow of the Great Depression: A Review
Essay on Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and
Misuses of History, by Barry Eichengreen. Journal of Economic Literature. 55(4).
pp.1583-1601.
Online:
Could the Great Depression Happen Again? 2017 [Online]. Accessed through:
<https://www.thebalance.com/could-the-great-depression-happen-again-3305685>
Government’s Role in the Financial Crisis, 2018 [Online]. Accessed through:
<http://dailysignal.com/2015/02/27/governments-role-financial-crisis/>
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The Great Recession – Causes and Effects of the 2008-2009, 2017 [Online]. Accessed through:
<https://cashmoneylife.com/economic-financial-crisis-2008-causes/>
Timeline: UK recession, 2017 [Online]. Accessed through:
<https://www.theguardian.com/business/2009/oct/23/uk-recession-timeline>
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