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Often we hear about the Great Depression of the 1930 being compared to the recession of 2008-2009. The Depression was followed by a financial system in the years before that went out of control with assumption in the markets and stocks were sold on margins with non-existent money. In 2008, the United States experienced a financial crisis followed by a deep recession. Several of the developments during the time were similar of events during the sass. This was causing many people to fear the economy might experience a second Great Depression.
In the years 1930-1933, ore than 9,000 banks suspended operations, often defaulting on their depositor. This caused the money supply to fall by altering the behavior of the depositors and the bankers. In the recession, the financial system was not able to perform normal operations, and the profitability of companies was called into question. When investment banks packed heaps of risky mortgages into mortgage-back securities then sold them to buyers that weren’t aware of the risks they were acquired. Between 1929 and 1933 the money supply fell 2 percent, at which time the unemployment rate increased from 3. To 25. 2 percent. The price level also fell 25 percent. In the Recession of 08-09, the Federal Reserve cut its target for federal funds rate from 5. 25 in 2007 to roughly zero in 2008. At this time, the unemployment rate was at 10. 1%. The monetary base rose 18 percent over the period, while it increased about 200 percent from 2007 to 2011. Additionally, the GAP decreased by 15 percent from 2008-2010. The Federal Reserve could have responded to the decline in the money multiplier by increasing the money base even more than it did.
The Reserve Act of 1932 increased various taxes, especially those falling on lower and middle income consumers. In 2008, Bush signed into law a $168 billion stimulus package which funded tax rebates. In 2009, Obama signed into law a $787 billion stimulus which included tax reductions and an increase in government spending. The Federal Stimulus plan during the Recession gave fiscal relief to states to lessen the impact of tax increases. During the Great Depression, the Federal Reserve did little to try and save the economy.
The Feds lowered the reserve requirement to expand the money supply, but not enough to have a lasting impact. This led to high unemployment, slow growth, and deflation. The Recession was a bit similar. The Feds were able to create money by raising member banks deposits at the Federal Reserve which they could lend to the public. Bank failures during the Depression enlarged the currency- deposit ratio by lowering public confidence in the banking system. Furthermore bank failure raised the reserve-deposit ratio by making bankers more cautious. The
Recession of 2008-09 saw the reserve ratio rise substantially because banks chose to hold substantial quantities of excess reserves. In October of 2008, the Feds started paying interest on reserves which influenced the economy. The higher the interest rate on reserves, the more reserves banks will hold. In other words, an increase in the interest rate increases the reserve ratio. The decline in income during the sass coincided with falling interest rates. Furthermore, the fiscal policy of the sass contributed to the contraction shift in the IS curve.
Furthermore, the Stock Market Crash of 1929 may have also contributed to this shift. During the Recession, the interest rates were kept low in the terminal to 2001, which encouraged households to borrow or buy houses. By keeping rates low, the Feds added to the housing bubble that eventually failed. From 2006-2009 housing prices nationwide fell about 30 percent. During the housing boom, many homeowners bought home with mostly borrowed money and minimal down payments. When prices fell, homeowners owed more on mortgages than the homes were actually worth.
Since the stock market Latinity reached levels not seen since the Great Depression, this led to a decline in consumer confidence in the recession. This, and other events, made the economy experienced a large contraction shift in the IS curve. Critics of the Federal policy claim the Feds should have taken a more vigorous role in preventing bank failures by acting as lenders of last resort when the banks needed cash in the Great Depression. Many companies rely on the financial system to get the resources they need for business expansion and managing their short-term cash flows.
With the financial yester not able to perform normal operations, the profitability of companies was called into question. Overall, the economy was recovering from the recession of 2008, although it was happening very gradually. The FIDE increased the amount guaranteed from $100,000 to $250,000 per depositor. Economic growth was positive but well below the rate experienced during previous recoveries. More so, policymakers could take some credit from having adverted another Great Depression. The Great Depression v. S. The Recession of 2008-09 Shallowness Patton Economics April 15, 2013 Proof. Borrow