A Quantitative look at the Great Depression

The Great Depression, according to Ben Bernanke, a former member of the Federal Reserve Board of Governors, was brought on by the stock markets’ and banks’ frail organizational systems. In the United States, the Great Depression began in August 1929 and lasted until the early 1940s. Despite the intentional decline in interest rates, consumer purchasing and investment activity decreased. Due to business layoffs, the changes led to a decrease in industrial output and a rise in unemployment rates. Recovery attempts started in 1933, and by 1940, unemployment in the United States had decreased from 25% to 15%. (Fred online).The subprime crisis is a set of events that brought about a mortgage financial crisis in the United States. Subprime mortgages are awarded to applicants who have a weak credit score and are likely not to pay back. In 2005, housing sector had peaked with houses having a higher price than their value. Consumers were forced to finance their homes by taking second mortgages. However, in 2007 interest rates became higher and this led to homeowners avoiding payments of mortgages due to the high payments. The number of mortgage repayment defaulters rose to 79 percent in 2007. Subprime lending contributed to this crisis. Subprime mortgages increased from 10 percent in 2004 to 20 percent by 2006. By 2007, over 1.3 trillion dollars subprime mortgages had been given and by 2008, 25 percent of mortgage delinquency a figure that rose from over 10 percent in 2006 (Noah, 21).

Federal Deficit

The subprime crisis saw a series of government spending towards rejuvenating the economy. Defaults on loans increased and the crisis spread to other parts of the U.S economy. Financial institutions and corporations were declared bankrupt, and they depended on the government bailout. Banks and other financial lenders turned to the government organization Federal Reserve as a backup of liquidity. The Federal Home Loan Banks served as the last option creditor for the financial institutions.

In the early 1930s, there were signs of growth in the economy as the government increased its spending. The government had to introduce various programs to curb unemployment.

Crisis recovery

The newly elected president, Franklin D. Roosevelt after his inauguration started measures to recovery from this crisis. The first measure was to reform legislation to stabilize industrial and agricultural production, create new employment opportunities and start a recovery process. The Treasury had frozen all gold inflows from the end of 1936. This move led to the monetary base not growing. The Treasury realized the mistake they had done, and they were forced to activate the gold holdings. In June 1938 the economy began to recover.

The government had to lower federal funds target set to solve the Subprime crisis. The government also provided support to the financial institutions by providing liquidity support. The subprime crisis is the shortest ever crisis. By the end of 2008 and mid-2009, the governments’ efforts to stop the crisis were proving successful (Noah, 26).

Unemployment in 1937-38

After the Great Depression, there were efforts to recover from the crisis. However, this effort was halted when the Congress in 1936 overturned President Roosevelt veto. Unemployment dropped from 20.44 percent to 12.11 percent. There was a tightening of fiscal and monetary policy. Institutions such as Tennessee Valley Authority were set to provide permanent employment to 8.5 million people from 1935 to 1943 (Fred online).

Conclusion

Both of the crises affected economies in the world. The Great Depression was highly characterized by unemployment and declined GDP in most countries. The subprime crisis on the other hand mainly affected financial institutions and the stock markets. Governments had to intervene through deficit spending quickly. These two crises have taught countries good lessons for future use.

Works Cited

Berlatsky, Noah. The Global Financial Crisis. Detroit, MI: Greenhaven Press/Gale Cengage Learning, 2010. Print.

Fred. (2012, August). Unemployment Rate for United States | FRED | St. Louis Fed. Retrieved from https://fred.stlouisfed.org/series/M0892AUSM156SNBR