EC2034 Economic History: Analysis of Economic Crises and Policies

This report provides an in-depth analysis of three significant economic crises: the dot-com bubble of the 1990s, the Great Depression of the 1930s, and the Asian financial crisis of 1997. It examines the causes, effects, and policy responses to each crisis. The analysis of the dot-com bubble focuses on factors such as overvalued stocks and speculative investments. The Great Depression's analysis covers the stock market crash, bank failures, and government interventions like the New Deal. The Asian financial crisis section explores the collapse of the Thai Baht, the spread of the crisis, and the role of the IMF. The report highlights the roles of the Federal Reserve, government policies, and international organizations in addressing these crises, offering a comparative perspective on economic history and policy effectiveness. The assignment is a report on the economic crises and it covers the causes and effects of major economic crises like the dot-com bubble, Great Depression, and Asian financial crisis, along with policy responses.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

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Answer 1
Introduction
The investors during the 1990s poured a lot money hoping that those companies will
become profitable after some time. There were specially two factors which led to the burst of
the internet bubble. One is the usage of metrics which is known to ignore the cash flow and
the other is significantly overvalued stocks. The dot com bubble is known to grow due to the
combination of the presence of speculative investments, advance of the venture capital
funding for the startups and also due to failure of the dotcoms for turning a profit. The
investors at that point of time were known to pour huge amount of money into the internet
startups since the 1990s by hoping that those countries will become profitable some day1. The
federal reserve of the United States and the Central bank took many steps for expanding the
money supplies in order to avoid the risk of a deflationary spiral. The government also
enacted huge amount of self reinforcing decline in the global consumption. The Federal
Reserves new and expanded liquidity facilities intended to enable the central bank for
fulfilling the traditional lender of last resort role at the time of crisis while mitigating the
stigma. This kind of credit fix have brought the global financial system to the brink of
collapse. There had been an immediate response from the central bank of England
The Great Depression
The great depression was a severe economic depression which took place worldwide
during the 1930s. It have started in the United States when there was a major fall n the stock
1 Sengupta, Rajeswari, and Abhijit Sen Gupta. "Capital Flows and Capital Account Management in Selected
Asian Countries." Global Financial Governance Confronts the Rising Powers: Emerging Perspectives on the
New G20 (2016): 29.

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prices that took place in 1929 and the stock market crashed for the entire world. As a result
of this , the gross domestic product worldwide declined to 15 percent. The great depression
had a huge devastating effects for both the rich as well as for the poor. The sudden collapse
of the US stock market took place in 29th October 1929 which is also termed as Black
Tuesday. After that the rates of interest have declined a lot and people had to decrease their
spending. Prices in general started to decline leading to a deflationary spiral in 1931. The
main causes of the great depression is the crash of stock market in 1929, bank failures,
reduction in purchase across the board and severe drought condition. One of the main reason
of the Great Depression was the crash of the stock market which is known to take place in 29
the October , 1929. The stockholders at that point f time had lost more than $40billion of
investment and the effect of the crash of stock market rippled throughout the economy. More
than five hundred banks k own to have failed during 1929 and more than three thousand
banks of the collapsed at that time. This kind of situation also made people to spend less
amount of money2. When the huge amount of savings became worthless in nature their
investments started to diminish. Both consumers and companies used to spend less and
therefore, there was recession. For this reason, large number of workers were laid off. Since
most of the people were losing jobs, they were not able to pay for the goods which they had
already bought though instalment plans. Also, at that point of time, the rate of unemployment
rose by more than 20 percent which also meant that less spending to help alleviate the
economic situation. Since The Great Depression lead to severe loss in the economy, the
government off he United States was forced to act for protecting the US industry. The
government at that point of time imposed tariff on the imported goods and for that reason a
large number of trading partners retaliated by imposing tariffs on the goods made in US
which resulted in decline of the world trade between 1929 and 1934. The economic condition
2 Castells, Manuel. Another economy is possible: culture and economy in a time of crisis. John Wiley & Sons,
2017.

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at the time of great depression had been made worse by the year long drought. The year long
drought with traditional arming practice which did not know how to preserve soil lead to
huge amount of dust storms which killed many people. Therefore, thousands of people had to
run when the economy collapsed.
The monetary policy of the Federal Reserve had been is guided between 1929 to 1933
since at that time, it only had two tools for influencing the money supply which are the open
market operations and the discount rate which the banks are allowed to borrow from Fred.
The Federal Reserve at that time paid close attention to the international gold standard. When
there was a crash in the stock market in the year 1929, the response of New York had been
quite rapid and effective in nature3. They at that time were known to inject liquidity by
conducting huge scale of open market operations. The supply of money at that time also fell
sharply and was same till the 1934. The Federal Reserve at that time reduced the amount of
credit outstanding which also forced the banks to sell their assets in order to get emergency
liquidity. After that when the gold standard was abandoned by Great Britain during 1931, the
central bank had to increase the discount rate in order to prevent outflows of capital. This
however had put huge pressure on the banks where more than 1800 failed. Until the month of
April in 1932, large scale open market operations were known to be delayed and for that
reason, by July of that year, the stock market had already crashed and had fallen by a loss of
89 percent.
3 Lins, Karl V., Henri Servaes, and Ane Tamayo. "Social capital, trust, and firm performance: The value of
corporate social responsibility during the financial crisis." The Journal of Finance 72.4 (2017): 1785-1824.

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Response of policymakers during Great Depression
In the United States, the Federal Reserve Bank are known to control the monetary
policy whereas the President controls the fiscal policy. During the year 1932, Franklin D.
Roosevelt, the President of USA created various federal government programs. The president
signed new deals which were designed for creation of more jobs, allowing unionization and
also provided them with unemployment insurance. The new deal made by the president
helped in safeguarding the economy and also prevented another depression. The huge number
of bank failures forced the government to establish the National Credit Cooperation in the
year 1932 which was designed for helping the commercial banks for purchasing marketable
assets and also provide alternative borrowing facilities. The government in 1932 campaigned
in favour of conservative fiscal policy for fighting the Great Depression. The policymakers
however did not do much before 1932. The government advocated for sharp reduction of the
government expenditures and abolished useless commissions. The monetary policy was not
used for stimulating the economy at that period of time. Electing President Franklin
Roosevelt at that point of time became the turning point. He created a series of measures for
fighting great depression which was termed as the “New Deal” which was used for stabilizing
the economy. The government of the United States in terms of fiscal policy, moved away
from the balanced budget by adopting an aggressive spending policy. After that the spending
of government rose from 3.2 percent of gross domestic product to 9.3 percent of gross
domestic product from 1932 to 1936. These spending’s ere then financed by the budget
deficits. The government also created a system of deposit insurance for stabilizing the
banking system. The New Deal made by the government not only brought changes in policy
but also brought changes in attitudes towards the policymaking.

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Asian financial crisis
The Asian Financial crisis originated in Thailand n the year 1997 and then quickly
spread to other parts of East Asia. The financial crisis of Asia was known to be have gripped
much of East as well as Southeast Asia which began in 1997 and increased fears of a
worldwide economic meltdown as a result of financial contagion. The financial crisis have
started in Thailand where the Thai Baht have collapsed and then the government of Thailand
were forced to float the baht. The government was forced to do so due to lack of foreign
currency in order to support its currency peg. The Asian Contagion was the sequence of
currency devaluations that began in 1979. Since the government of Thailand decided not to
peg the local currency o the US dollar, the currency market of Thailand failed for the first
time and then it spread rapidly throughout Asia. As a result of this, the stock market crashed
which also reduced revenues. Due to the devaluation of Baht, the East Asian currencies fell
sharply by 38 percent. The countries which were mostly affected by the Asian financial crisis
were South Korea, Indonesia and Thailand compared to Singapore, Taiwan, Vietnam and
china which were comparatively less affected due to the financial crises. The foreign debt to
gross domestic ratios increased from 100 percent to 167 percent in case of ASEA economies.
One of the reason of the Asian currency crisis was due to macroeconomic weakness. Though
both the fiscal and monetary policies aimed at stabilizing the monetary impact of the large
capital inflows, they however avoided large appreciations against the US dollar which was
the main currency against which they pegged their exchange rates. Many countries include
Thailand and Korea suffered from showdowns of substantial exports in the year 1996 despite
the high rate of investment. The macroeconomic situation at the end of 1996, presented a
troubling situation for some of the countries. During the 1990s, the Asian countries
experienced huge amount of capital inflows which ranged from 3 percent of GDP in case of
Korea to 10 percent in Malaysia. Large amount of inflows of capital, were known to be

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intermediated through weak domestic financial institutions. The combination of large amount
of capital inflows with financial sectors and the involvement of government lead to financial
fragility of an overleveraged corporate sector. During the 1990s, these Asian countries like
Indonesia and Thailand were known to have large amount of deficits in current account while
maintaining the fixed exchange rates encouraged for external borrowing leading to foreign
exchange risk. Devaluation of Chinese currency and the Japanese Yen with the increasing
interest rate of the United States adversely affected the growth of the Asian countries. The
higher US Dollar made the exports of Asian countries more expensive and less completive in
the global markets which slowed the growth of exports of the south Asian countries leading
to the deterioration of the position of the current account.
Response of the policymakers
The situation got better with the intervention of the International Monetary Fund that
provided enough loans for stabilizing the Asian economies. The International Monetary Fund
have provided $110 billion loans Thailand, South Korea and Indonesia for helping them to
stabilize their economies. The financial crisis which took place in Thailand with a lot of
speculative attacks on the baht known to unfold after several decades. The IMF was called in
in order to provide financial support for the above mentioned countries that have been
seriously affected. The strategy includes macroeconomic policies, structural reforms and
financing. An amount of US$35 billion of IMF financial support had been provided to the
Asian economies for adjustments programmes. The monetary policy had been tightened in
order to save the country from the collapse of the exchange rates. The tightening of the
monetary policy were although had been temporary in nature. The tight monetary policy
prevented currency depreciation which can lead to inflation and continuing depreciation of
the currencies. There was only little or no attempt made for raising the interest rates. The
government of Thailand also aimed for contractionary fiscal policy which was introduced for

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reducing the excessive deficit of current account. The programs which were supported by
IMF had been less successful for restoring the confidence of South Korea, Indonesia and
Thailand. The financial markets then stabilized during 1998 at first in Korea and Thailand.
The exchange rates started to recover and then rate of interest also started to decline after
that. The contractionary monetary policy imposed by the government helped in reversing the
pressure of the exchange rate and also prevent the inflationary spirals. Therefore, it can be
said that structural reforms were important for restoring the confidence of the firm.
The international monetary fund recommended a sharp rise in the rate of interest for
restoring confidence, stabilizing the currency and outflow of stem capital for the crisis
affected countries. However, many economist stated that this particular approach made by
IMF was counterproductive. They stated that the low interest rate could have made it quite
easier for the firms for maintain production by restoring the confidence of the investors.
The dot com bubble
The dot com bubble took place in 1994 in the United States. During the dot com
bubble, the value of the equity markets grew tremendously where Nasdaq index increased
from 1000 to 5000 between 1995 to 2000. After that stock market crashed and lasted till
2002. When the stock market crashed, a lot of online shopping companies and
communication companies like WorldCom and Global Crossing have failed and had shut
down. The investors during the 1990s poured a lot money hoping that those companies will
become profitable after some time. There were specially two factors which led to the burst of
the internet bubble. One is the usage of metrics which is known to ignore the cash flow and
the other is significantly overvalued stocks. The dot com bubble is known to grow due to the
combination of the presence of speculative investments, advance of the venture capital

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funding for the startups and also due to failure of the dotcoms for turning a profit. The
investors at that point of time were known to pour huge amount of money into the internet
startups since the 1990s by hoping that those countries will become profitable some day.
However, when the capital markets were investing a lot of money to this particular sector, the
start ups were in a race to become fast. The companies without any kind of proprietary
technology is known to abandon the fiscal responsibility and the spent a fortune on
marketing for establishing brands which would help in differentiating themselves from the
competition. Some of the startups were known to spent as much as more than 90 percent of
their budget on advertising. Huge amount of capital started to flow into the Nadaq by 1997
where by 1997, 40 percent of the venture capital investments had been gig to the internet
companies. In the year 1997, around 300 of the 457 IPOs had been related to the internet
companies. The bubble ultimately then busted in a spectacular manner leaving many
investors
Facing huge loses where several internet companies bust. The companies which
survived the bubble was Amazon, eBay and Priceline. The year 1997 had a period of rapid
technological advancement which took place in lot of countries. However, it was the
commercialization of the internet which is known to led to the greatest expansion of the
capital growth faced by many countries. Though the high tech markets like Oracle, Intel and
Cisco were known to drive the growth of the technology sector, it was the start of the dotcom
companies which is known to fuel the stock market since 1995. The bubble which formed
after the 1995 were known to be fed by cheap money, overconfidence of the market, pure
speculation and easy capital. The venture capitalists then freely invested in any company
which has a “.com”after its name. The valuations were known to be based on earnings . The
firms which had to generate huge amount of revenue or profits went to the market with the
initial public offerings where the prices of the stock markets tripled. The investors at that

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point of time were known to pour huge amount of money into the internet startups since the
1990s by hoping that those countries will become profitable some day. However, when the
capital markets were investing a lot of money to this particular sector, the start ups were in a
race to become fast. The companies without any kind of proprietary technology is known to
abandon the fiscal responsibility and the spent a fortune on marketing for establishing brands
which would help in differentiating themselves from the competition. The Nasdaq index
peaked on March 2000 which nearly doubled over the year. When he market was at its peak
huge number of huge tech companies known to have placed a huge sell orders on their stocks
which lead to a sparking panic selling among the investors. After few weeks, the stock
market have known to lost 10 percent of its value. When the investment capital started to dry
up, the lifeline of the Dotcom companies also dried up. The dotcom companies which had
reached the market capitalization in hundreds of millions of dollars known to have become
worthless within few months. By 2001, most of the dotcom companies folded and trillions of
dollars of investment capital known to have evaporated.
Policymakers response to the problems
Considering this particular internet bubble, where investors had lost huge aim of
money it can be said that popularity always does not mean equal amount of profit. The hot
internet stock might do well in the short term they are not reliable for the long term
investments. During the long run, the stocks need a strong source of revenue for performing
well in investments. Companies are also appraised by measuring their future profitability
however, speculative investments can turn out to be highly dangerous in nature. Investing in
sound business model is also very important. Many investors were also not realistic
concerning about the growth of the revenue at the time of the first internet bubble. People
only recognize bubbles after its bursts. The central bank are known to strive for delivering the
stability in prices, financial growth and the growth. The asset price bubbles are known to

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present a direct threat for achieving these goals , therefore, the monetary policymakers had to
accord them a role in their policy decisions. The expansion of an asset price bubble may lead
to a debilitating misallocation of economic resources. Therefore an appropriate monetary
policy in case of assert bubbles remains unclear. Some of the policymaker shave suggested
that the monetary policy should be used to reduce the asset price bubble for alleviating its
adverse consequence on the economy. While the other policymakers commented that such
policy might be impractical and unproductive.
One of the monetary policy that had been proposed is the standard policy and the
other is the bubble policy. One of the aim of the bubble policy is to reduce asset price bubble.
Therefore it has been found out that the movement in the bubble component might have a
serious impact on the macroeconomic performance. Therefore, it is preferable for the central
banks to eliminate this source of macroeconomic fluctuations directly. The firms which had
to generate huge amount of revenue or profits went to the market with the initial public
offerings where the prices of the stock markets tripled. The investors at that point of time
were known to pour huge amount of money into the internet startups since the 1990s by
hoping that those countries will become profitable some day. However, when the capital
markets were investing a lot of money to this particular sector, the start ups were in a race to
become fast. On the other hand, when the asset price bubble expands, the standard policy
recommends that higher interest rates can offset any economic stimulus which is generated
by the bubble. This policy therefore will try to reduce the size of the bubble by setting the
interest rate higher. By doing so, this particular policy will trade off the near term deviations
from the central bank’s ,macroeconomic goals for the better overall macroeconomic
performance.

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Financial crisis
The financial crisis which is known to take place during 2007 and 2008 was also
termed as the global financial crisis. The financial crisis had been the most serious financial
crisis after the great depression. This crisis started in 2007, with a crisis in the subprime
mortgage market in the United States. It have then developed into a full grown financial
crisis with the collapse of the famous investment bank, Lehman Brothers. Excessive risk-
taking by banks such as Lehman Brothers helped to magnify the financial impact globally.
One of the main reason behind the crisis was the US housing bubble which have peaked in
2006. The easy availability of the credit in the United States fuelled by large inflows of the
foreign funds after the Russian debt crisis in 1997 known to have resulted in the boom of
housing construction and also facilitated the debt financed spending of the consumer. As
banks started to give out more loans to the potential home owners the price of housing started
to increase. The loans of various types was easily available and t consumers assumed an
unprecedented debt loan. Another reason behind the financial crisis is the easy availability of
loans. The lower rate of interest encourage large amount of borrowing the federal reserve
known to have lowered the interest rate in order to soften the impacts f the collapse of the dot
com bubble. Due to the low interest rate it was noticed that there was a rise in housing nstaed
f business investment. There was also pressure on the interest rates which was created by the
high and rising US current account deficit which peaked along the housing bubble. The
financial crisis mostly took place due to several reasons that include subprime lending,
predatory ending, incorrect pricing of risk, wrong banking model, deregulation, easy credit
creation and increased debt burden. Huge increase in the commodity prices lead to the
collapse of the housing prices. The price of oil also increased a lot before the financial crisis
took place. An increase in oil prices tends to divert a larger share of consumer spending into
gasoline, which creates downward pressure on economic growth in oil importing countries.