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saurav_k

The Great Depression & The Current Crisis in US

The Stakeholders:

Subprime borrowers, Investment Banks, privately-owned investment funds, corporations, pension funds, mutual funds, banks and individual investors, and many others

The Current Crisis:

The falling property rates compelled a lot of people who had taken loans at high interest rates to default on the repayment.

Banks had already repackaged the loans as CDOs and sold them to investors across the globe.

When the borrowers defaulted on the loans, the CDOs became worthless and the investors lost their money. Banks also had no money to lend. This compounded the problem further.

This is known as the Subprime Mortgage crisis. The bursting of the housing bubble plunged the US into an economic crisis that had far-reaching effects across the globe.

The government decided to step in to bailout the economy and got the Congress to approve a $700 billion Emergency Economic Stabilization Act of 2008.

The Great Depression of 30's

The current economic situation does bear disturbing similarities to the Great Depression of the 30s.

The depression was perhaps the worst phase in the history of the US. By the end of the depression nearly a quarter of the population of the US was unemployed. The Dow index had fallen by a massive 89%.

The current economic situation is also very bad but not yet a depression. But it could be heading towards one.

For the moment, it is not even a recession. To qualify as a recession, the gross domestic product must shrink for at least two consecutive quarters.

Similarities:

At the beginning of the Great Depression, there were big declines in the stock market. As a consequence, there was a reduction in people's wealth and a general decrease in spending. The Dow index fell 47% in a couple of months.

In October 2008, the Dow index again fell 42%, a margin that was uncannily similar to its initial fall in 1929. Things could be far more serious this time around because a lot more people have invested in stocks.

In 1929, the banking system collapsed because of bad loans given to people who made risky investments in stocks.

In 2008, the banking system again collapsed on bad loans. This time around the loans were made to homeowners who defaulted on repayment and to investors in mortgage-backed securities.

The depression worsened when banks stopped lending to avoid further losses. This slowed the economy even further. About five years after the depression began more than 5,000 banks had collapsed.

Even today, banks have cut down on lending to avoid losses. This has nearly brought the credit markets to their knees.

Differences:

In the 30s, the Fed’s reaction to the economic crisis was to increase interest rates. This drained liquidity from the markets and slowed down the economy further.

The government contributed to the crisis by raising taxes to balance the budget. It also raised the fees charged on imported goods. Reacting to this move by the US, other countries followed suit. This badly affected exports and crippled US industries.

In 2008, the government played a more active role in preventing a meltdown. The Federal Reserve played an active role in shoring up the economy as “the lender of last resort”.

The Fed has also cut interest rates many times since the first signs of the crisis began showing up. It has also arranged for financial institutions to barter troubled assets for Treasury securities.

The 1929 depression was triggered off by the bursting of the stock bubble. The current economic situation is the fallout of the over-evaluation of commodities, stocks, mortgages and real estate.

The prevalent economic situations were also different. In 1930, the US was a country that was driven by manufacturing and agriculture. Today, it is a consumer and service economy. The recovery of the economy this time around will depend on how soon consumers start to spend again.

Admin

Your last line >> "The recovery of the economy this time around will depend on how soon consumers start to spend again" Is really the key out of this situation but there are so many factors which control consumer spending and its one big bad circle which has now been disturbed by the morgage lenders who made a fortune from the commision/bonuses they used to get from their respective banks for every loan they got sanctioned and in the process there were millions who were not really financially healthy enough to keep paying the amount of monthly installments they had which slowley resulted in houses being sold off due to unability to keep paying their morgage and thats somethign which brings the real estate prices down ... this started a chain reaction sort of thing...

Even those who really can afford a new house are not buying these days thinking they will get it even cheaper a year down the line and at much lower interest rates which is true to an extent but is not helping the situation as a whole.

Consumer spending in my opinion is not going to get back to normal for the next year year and a half may be two as this cycle when it breaks leaves a very big hole to plug which is not something the governments can handle single handedly.

I dont believe that these bailout packages by different governments are helping the situation... these banks should have been allowed to go bankrupt and those auto makers should have shut shop by now... these governments are now artificially trying to make these sick businesses live a little more longer then they would have orignally lined for which is not right for the markets.


In the end of this bad bad cycle (for developed countries) we here in India are going to be the winners due to the fact that we are the ones who have got cheap labor and cheaper products... There was a time when India was the richest country on thie earth and then came industrial revolutions... western countries started producing cheaper and that kind of killed the quality but costly stuff Indians used to produce... Isint this situation very similar to what happened back then? its us who have cheaper stuff now... quality? well its the same world over... its an era of globalisation thankfully.. So what we in India need to do is sit back and start producing what sells... we know how to produce it cheaper... be it technology.. research or even manufacturing..

saurav_k

very true ... the cheap labour point u raised is very important ... india is no.1 in the world for providing cheap labour ... even chinese labour is considered expensive than india's ... but who do we provide this cheap labour to ... mostly us and europe .. this economic crisis will not help india much either ... coz the need of labour whether it be cheap or not is decreasing becoz of this ... just abt 30mins ago i saw on ndtv india ... that ...70,000 ppl lost their jobs in us and europe on a single day i.e yesterday and almost abt 1crore indians are predicted to lose jobs in the next 2months ... mostly from the export sector .. 1 crore may be an inflated figure (indian news channels - you know ) .... but still ... these are real tough times for us - indians too and IMO this is not going to get better for some time ...