• harshita Verma

How History Repeats: Great Recession and Great Depression

Updated: Apr 25, 2020

We have penetrated into Recession and major part of the world is in lockdown due to COVID-19 with no wave of restraining the spread. But the question is, have we been through this before? Why do all the Recessions start with the US? Can we compare 1929 or 2008 crises with 2020? US has the largest economy since 1871 the size of the US economy is in $20.58 trillion. Flash from the past if we recall The Great Depression of Wall Street Crash of 1929 were in 1920 USA Economy started to take a speed also called the phase of “Roaring Twenties” in which stock prices increase along with good returns also the mass production of new appliances like refrigerator, washing machine, radio etc. Got doubled in 2 years which result in an increase of share value but everything is so fleeting and impermeant the share prices got overvalued and the magic faded to fast. During 1927-1929 the stock prices were not even justifying the earning of the company it was insanely high that the bubble finally busts on 24 Oct 1929-33. Oct 1929 also known as black Thursday in which prices of share stated decline by 90%. People stopped investing which result in low production and unemployment and due to which they stated withdrawing from the bank aftermath low liquidity in 1933 and Around 9000 banks failed and gave rise to banking panic of the 30s. speaking of low liquidity the same thing happens during 2008 crises The global financial and economic meltdown with catastrophic implications which was started in 2000s Investors from the US and abroad started throwing their money at US housing loans with the idea of getting more returns to compare to rates on mortgages. Countrywide financial corp. and Ameriquest Mortgage Companies gave around $177bn subprime loans. AIG the worlds largest insurance comany started giving insurance on CDO’s named CDS (credit insurance swap) but when CDO’s started to default AIG suffered the loss of $99bn. the interest rate started to increase which earlier came down to 0-4% and due to economic collapse, people were unable to pay the loan and started to withdraw from the bank. Lehman brothers who were one of the top investment banks got bankrupt due to which 25000 employees lost their jobs but why the US economy become the reason for depression in another country? It is due to low global trades. During 1930 US President Herbert hoovers Smoot Hawley tariff act and increase the tariff on imports from 2.5bn to 7bn dollars however during 2008 crises U.S trade fall down from $695.9 bn to $315 bn (45.3%). The historical collapse in global trade reflects the financial crises on demand of goods and services and the impact of widespread loans needed for finance trade. The deficit increase from $36.4 bn to $40.2 bn.

Now we have entered into the huge crises that is COVID-19 which is affecting the production of tourism industries, aviation, entertainment, event management, hotel etc. however for the smooth recovery of hotels and travelling business Mohanty has advocated GST holidays for the next 12 months but the shocking part is that This outbreak is not the only reason of U.S economic slowdown. The Another reason is corporate debt that is around $10 trillion (47% of the total U.S economy) however during the last recession of 2008 the total debt was $4.9 Trillion (35% of total us economy). Generally, during the time of recession, they mostly target the flow of money in the economy by dropping the interest rate but during this recession, U.S interest rates are already around 1%, therefore, the govt. and the federal reserve doesn’t have any option to overcome this economic crisis. So the question arises Can we compare 2008 crises with 2020? The potential answer is no. because the best part about 2020 rescission that it’s under our hands we can take precautionary measures to prevent the spread of disease, the soon the better otherwise people will die not only due to the virus but also due to unemployment or food crises.

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