During the late 2000s, the Great Recession was characterized by a dramatic drop in economic activity. It is often regarded as the worst downturn since the Great Depression. The term “Great Recession” refers to both the United States’ recession, which lasted from December 2007 to June 2009, and the worldwide recession that followed in 2009. When the housing market in the United States transitioned from boom to bust, large sums of mortgage-backed securities (MBS) and derivatives lost significant value, the economic depression began.
Why did the financial crisis of 2008 not evolve into a depression?
Even when consumers and businesses cut down on their own spending, unemployment insurance, Social Security payments, and increased government at the federal, state, and local levels keep money coming into the economy.
Keith Hembre, chief economist at First American Funds, stated, “There are a lot more safeguards in place.”
According to Hembre, the $787 billion stimulus measure agreed by Congress in February will boost economic activity in the future.
Furthermore, the Federal Reserve, under the leadership of Great Depression specialist Ben Bernanke, has injected trillions of dollars into the economy through novel lending schemes that the central bank has never tried before. This has increased the money supply. During the Great Depression, on the other hand, the money supply tightened.
Many additional policy blunders were committed in the 1930s that economists argue aren’t being repeated today, such as high tariffs that stifled international trade and government-imposed pricing and production caps.
Even if Congress included “Buy American” restrictions in the stimulus-funded public works projects, there is no clamor to return to rigid protectionism or production and price controls of the 1930s.
“I’d like to think we’ve learnt something, so we’re doing better in terms of policy,” Achuthan added.
Even if the United States does not face another depression, many Americans are still suffering from the current economic turmoil. Furthermore, few economists believe the slump will end soon.
Hembre expressed concern that the country could enter a period of prolonged economic stagnation comparable to Japan’s so-called “lost decade” in the 1990s. He believes that continuing housing difficulties and excessive debt levels among consumers and governments will slow the economy for some time.
What distinguishes the Great Recession from the Great Depression?
The primary distinction between the Great Recession and the Great Depression is the length of time and severity of the events. The US housing bubble burst in 2007-2009, resulting in the Great Recession. The Great Depression occurred between 1929 and 1939, when stock prices plummeted dramatically.
Why did the Great Recession last so much less time than the Great Depression?
The price level decreased by 22% and real GDP plummeted by 31% during the Great Depression, which lasted from 1929 to 1933. The price level climbed slowly during the 2008-2009 recession, and real GDP fell by less than 4%. For a variety of factors, the 2008-2009 recession was substantially milder than the Great Depression:
- Bank failures, a 25% reduction in the quantity of money, and Fed inaction culminated in a collapse of aggregate demand during the Great Depression. The sluggish adjustment of money pay rates and the price level resulted in massive drops in real GDP and employment.
- During the 2008 financial crisis, the Federal Reserve bailed out struggling financial institutions and quadrupled the monetary base, causing the money supply to rise. The expanding supply of money, when combined with greater government spending, restricted the fall in aggregate demand, resulting in lower decreases in employment and real GDP. (21)
The 20082009 Recession
Real GDP peaked at $15 trillion in 2008, with a price level of 99. Real GDP had declined to $14.3 trillion in the second quarter of 2009, while the price level had climbed to 100. In 2009, a recessionary void formed. The financial crisis, which began in 2007 and worsened in 2008, reduced the supply of loanable funds, resulting in a drop in investment. Construction investment, in particular, has plummeted. As a result of the worldwide economic downturn, demand for U.S. exports fell, and this component of aggregate demand fell as well. A huge injection of spending by the US government helped to soften the decline in aggregate demand, but it did not stop it from falling.
The supply of aggregates has also dropped. A decline in aggregate supply was caused by two causes in 2007: a spike in oil costs and a rise in the money wage rate. (21)
Was the Great Recession more severe than the Great Depression?
- The Great Recession was a period of economic slump that lasted from 2007 to 2009, following the bursting of the housing bubble in the United States and the worldwide financial crisis.
- The Great Recession was the worst economic downturn in the United States since the 1930s’ Great Depression.
- Federal authorities unleashed unprecedented fiscal, monetary, and regulatory policy in reaction to the Great Recession, which some, but not all, credit with the ensuing recovery.
What caused the Great Depression?
It all started after the October 1929 stock market crash, which plunged Wall Street into a frenzy and wiped out millions of investors. Consumer spending and investment fell sharply during the next few years, resulting in significant drops in industrial output and employment as failing businesses laid off workers.
Was the financial crisis of 2008 as bad as the Great Depression?
We were hit by the worst financial shock in history ten years ago, far worse than the Great Depression. Indeed, during the 1930s, “only” a third of U.S. banks failed, although former Federal Reserve chairman Ben S. Bernanke declared bankruptcy in 2008.
What parallels may be drawn between the Great Depression and the Great Recession?
In many other ways, the Great Depression and the Great Recession in the United States were similar. During both, the US economy experienced a sharp drop in output after a long period of economic expansion highlighted by financial excesses.
What is the difference between a recession and a depression in the economy?
The main distinction between a recession and a depression is that the former refers to a short-term economic downturn, whilst the latter refers to a long-term drop in economic activity. The duration of each event varies in general.
There have been 50 recessions in the United States’ history. The Great Depression of the 1930s was the only time there was a depression.
Continue reading to understand more about a recession, how it differs from a depression, and a snapshot of our present financial situation.
In comparison to earlier recessions, how bad was the Great Depression?
The Great Depression experienced substantially bigger declines in real gross domestic output than other recessions (GDP). The Great Depression was actually the result of two major economic downturns.
Was the Great Depression or the Great Recession more devastating to the United States?
The average worker’s pay will be 7.5 percent greater this year than it was in 2007, compared to 10.5 percent 11 years after 1929. And, if we’re lucky, next year’s per-worker income will be 9% higher, compared to a spectacular 29 percent increase 12 years after 1929.
But, you might wonder, didn’t World War II “save” the American economy after the Great Depression? Isn’t the fact that output per worker in 1941 far exceeded that of 1929 due to circumstance the fact that the US was rapidly organizing for a war of necessity against Nazi Germany and imperial Japan?
Not so fast, my friend. Defense spending accounted for only 1.7 percent of national revenue in 1940, and only 5.5 percent in 1941. After the bombing of Pearl Harbor in December 1941, the near-total mobilization that took production above its long-term sustainable potential began.
From this vantage point, we appear to have stumbled our way out of the recession. To be sure, anticyclical policies have been widely successful in the years following 2007, including fiscal stimulus under two presidents and the Fed’s extraordinary push to bring interest rates below zero. The Great Depression was significantly worse than the Great Recession, with a year’s worth of output lost before the economy recovered. But, unlike our forefathers, we are now tormented by the Great Recession in a way that the Great Depression was not. Looking ahead, it appears like we shall be tormented for an indefinite period of time. No objective observer predicts anything other than moderate growth, substantially slower than the years leading up to and following WWII. Nobody expects the haunting to end that the shadow cast by the Great Recession would dissipate.