Introduction
The great recession has occurred twice and affected the world’s financial market. The first occurred in the 1930s and the second in 2007-2008. There are different and similar causes of recession in both periods.
Different causes of recession on both periods
- The crash of the stock market was the main cause of the 1930s economic recession. Firms that had been listed in the stock market were affected by the crash. They failed to get the capital necessary to run their industries leading to the economic recession. In the 2007-2008 recession, a crash of the stock market was the consequence of the economic crisis but not the cause of the recession.
- The bank panic in the 1930s due to the crash of the stock market. The Bank of America that is privately operated was severely hurt. On the other hand, the 2008 crises was not as a result of bank panic. The bank panic came after the crisis.
- The 1930s economic crisis was not caused by government policy. The crisis came as a result of market instability. However, in the 2007-2008 crisis, the government policy on low-cost housing led to the economic crisis.
- In the 1930s economic crisis, the first world war had just ended. There was a prediction of the upcoming second world war. During this time, people avoided making investments. The lack of investment is viewed as a major cause of the economic downturn. During the 2007-2008 crisis, there was no major war that led to the recession.
- Unemployment resulted in the economic crisis of the 1930s. On the other hand, the economic recession led to unemployment in the 2007-2008 crisis.
Similar causes of recession on both periods
In both recessionary periods, the price of useful commodities rose. The price of assets such as houses increased as a result of bubbles.
- There was an increase of bank debts that was hard to be recovered in both periods. The debt led to the destruction of the federal reserve activity leading to recession.
- Poor economic decisions led to the recessions. Economists failed to advise the financial institution on the various means of avoiding risks such as the economic recession.
- Borrowing was unlimited by the low-interest rates. The rates were dropped to encourage people to take loans for development.
- Loans were issued in a risky way as the some issued were higher than the value of the collateral. When the borrowers failed to repay the loans, the bank credit collapsed.
Policies that were used to solve the recession
- The central bank employed some short term policies to respond to the crisis like to expand the monetary supply.
- Proposals for regulations such as the consumer protection that could lead to a long term solution.
- The Congress also came to rescue by proposing bills that led to the flow recovery of the economy.
- The courts played an important role in ensuring that those who were directly affected by the recession were adequately compensated.
- The mortgage market that led to recession remained in place.
Similarity of the 1930 and 2009 recovery and reinvestment program
The similarity between the new deal of 1930 and the recovery and reinvestment act of 2009 entails the invention of a stimulus program. The economic stimulus programs help solve some problems caused by recession within a short time.
My view on Lehman’s fall
The fall of Lehman produced a ripple effect in the economy, leading to the economic crisis. Therefore, the Treasury was wrong to let Lehman fail.
Lessons from the crisis
We have learned from the crisis that we are watchful when making important decisions for a small fault may affect a massive economy.
A possible cause of the next recession
It is hard to predict the cause of the next great recession. The next recession could be caused by the depletion of petroleum fuel. The majority of the economies globally uses the non-renewable fuel. On depletion, there will be little or no substitute for the fuel leading to the most aggressive crisis.