There are similarities between economic policies that led to the Great Depression and the economic policies that led to the Great Recession. The similarities can largely be categorized into two: expansion policies by American companies and structural weaknesses in the American economic system.
Expansion policies by American companies contributed to the Great Depression. During the 1920s, American companies had made record profits and saw it ideal to reinvest their profits back into the businesses. As a result, many American companies expanded to a bubble point; the American companies were unable to withstand their expansion efforts. Consequentially, there was a slowdown in the expansion (Robbins 15). Expansion policies also played a major role in the Great Recession. The housing mortgage industry was growing at a very high rate to the extent that it became impossible for people to buy new homes that had been built and that were being built. Prudent credit practices were abandoned in the securitization of residential mortgages. As a result, many people took mortgages but became unable to service them. Had financial institutions used prudent credit practices in giving loans, probably the Great recession would have been mitigated. By many people who were not credit-worthy taking up mortgages, a housing bust occurred (Palley 15).
Structural weaknesses in American economic system contributed to the Great Depression. Many banks operated without guarantees to their customers; any time things got tough, a climate of panic would occur. The economic system placed few regulations on banks, and as a result, banks operated the way that they wanted. Due to the few regulations, banks lent out money to anyone who was interested in taking up a loan; even people who their credit worthiness was suspect. For instance, banks lent money to people who would spend their time, speculating on stocks recklessly. Use of the gold standard as a mode of exchange rather than the exchange rate contributed to the occurrence of the Great Depression. Prior, too much money had been created in the United States to allow a return to the gold standard without devaluation of currency or deflation of prices. As a result, there were large currency devaluations and price deflations. Structural weaknesses in American economic system contributed to the Great recession (Palley 4). There was bank misregulation that created and leveraged accumulation of highest yielding securities among banks. The securities became under high demand. There was also an increase in leverage that was majorly driven by Fannie Mae and Freddie Mac credit policies that led to an increased obsession with home ownership. There was a reduction in down payments as well as loosened underwriting standards, contributing to the housing boom (Palley 14). The United States governments bailout of financial institutions in the 1980s had created an atmosphere where financial institutions exhibited absence of creditor discipline. Banks were taking risks like never before, giving out loans to people without asking them for enough collateral. Banks were creating too much money, using it to push up prices of houses and at the same time, using the money to speculate on stock markets (Baldwin 59).
Socially, Americans lived prosperous standard of living during the 1920s. European economies were struggling during the time because of their participation in World War 1, but on the other side, the American economy was thriving like never before. Due to the thriving economy, there was a proliferation of banking institutions. There was also an increase in banks giving loans to any individual who was interested in taking a loan. Many people were taking loans to buy property and invest in businesses. Before the Great Depression, poverty levels in the United States were the lowest in the world. Americas good standards of living were envied by Europeans. Consumer spending in the United States was the highest in the world. The government used to encourage consumerism. Families were urged to construct houses and buy household goods. Home ownership was highly advanced, and Americans were told that a wholesome family life could only be achieved by a family owning a home (Hoover 3).
Hoover, Herbert. Prosperity and thrift: The Coolidge Era and the Consumer Economy, 1921-1929. Washington, D.C.: Library of Congress, 1999. Internet resource.
Palley, Thomas. "Americas Flawed Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession." Empirica. 38.1 (2011): 3-17. Print.
Baldwin, Richard E. The Great Trade Collapse: Causes, Consequences and Prospects. London: Centre for Economic Policy Research, 2011. Print.
Robbins, Lionel R. The Great Depression. New Brunswick (U.S.A.: Transaction Publishers, 2009. Print.
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