The Great Depression and The Great Recession

This paper compares the depth of the recent financial crisis and the Great Depression. For decades, experts who have studied the Great Depression have wondered at some point whether it could happen again. We must put, however, things in perspective. The Great Depression was the result of the confluence of several crises that began with the contraction of the German economy in 1928, and was aggravated by the Wall Street stock market crash of 1929 and the U.S. banking crisis of 1930, which led to the Panic spread by all countries and a global financial crisis in 1931(Harold, pp. 779-816).

Over a period of three years, real GDP in the major economies fell by 25%, a quarter of the adult male population lost their jobs, the price of raw materials fell by half, the consumer price index fell by 30 %, the financial system collapsed in many countries (and credit in the U.S. fell by 40%), and almost all sovereign debtors were forced to suspend payments. Fortunately, the current crisis cannot be compared with the Great Depression.

The difference in the depth in the crises concurs with differences in policy reaction. During the Great Depression for several years fiscal policy tried to stabilize budgets instead of aggregate demand, and either monetary policy was not applied or was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates (Richardson, pp. 105-107).

There is growing consensus that much of the responsibility for the Depression was the politicians and rulers of that time: his myopia in the Paris Peace Conference led to an unsustainable situation worsened debts caused by World War I and led some flaws in the financial system that facilitated the cataclysm when the problems were accentuated.

In short, the Great Depression was largely caused by a failure of intellectual will. The big problem was that economic decisions were in the hands of people who were anchored in the recipes of the past, convinced of the ability of the invisible hand to resolve the situation, and they failed in their most basic responsibilities, acting as lenders of last resort or help banks in crisis in a panic.

But the worst lesson to be drawn from what has happened is that there is a moral hazard and that our actions have consequences. The irrepressible desire to return to the situation before the crisis may portend that we have not learned our lesson and we do not have the necessary will to make the necessary reforms. It is essential to change the model, introduce better regulation of the financial architecture, and modify the global institutional framework.

Whereas the similarities are concerned the first parallel is that the two crises originated in the United States. The current crisis is caused immediate coordinated action by the Federal Reserve and the European Central Bank to impose official interest rates very low for a long time, which inflated the bubble on both sides of the Atlantic. And in the 20's was just the same, ...