Recession 2008 : Comparison with The Great Depression Created By: Abhinav Sehgal Akshay Anand Deepika Misra Karishma Jindal Reuben Khanna

What is Recession ?  In economics, a recession is a business cycle contraction, a general slowdown in economic activity.  During recessions, many macroeconomic indicators vary in a similar way.  Production, employment, investment spending, capacity utilization, household incomes and business profits all fall.  Bankruptcies and the unemployment rate rise.

RECESSION 2008 : Causes The Housing Bubble Burst The Subprime Mortgage Fiasco Sky-High Price of Crude Oil and Refined Product Dollar Devaluation RECESSION 2008 : Causes

In US, a boom in the housing sector was driving the economy to a new level. Home Loans became cheap and demand increased. Lending institutions and mortgage firms wanted to give loans to as many potential customers as possible. Overbuilding of houses led to decline in prices and refinancing became difficult. As prices declined, more homeowners were at risk of default and foreclosure. The Housing Bubble Burst

The Subprime Mortgage Fiasco. Continuous Monetary Inflation suckered individuals into low-down-payment/low- interest adjustable mortgages. Incentive is to sell the property quickly Various institutions that hold the poorly performing debt obligations were forced to 'write down' the value of these assets. Record supply availability, falling prices, higher insurance costs and restricted credit were prevalent.

The American economy went from unprecedented prosperity in the 1920s to unprecedented misery in the 1930s. The Great Depression

A depression is a sustained, long- term downturn in economic activity in one or more economies. What is Depression? Considered, by some economists, a rare and extreme form of recession Characterized by abnormally large increases in unemployment, falls in the availability of credit and large number of bankruptcies Price deflation, financial crises and bank failures are also common elements

THE GREAT DEPRESSION : CAUSES  Stock Market Crash 1929  Bank Failures  Drought Conditions  American Economic Policy with Europe  Reduction in Purchasing Across the Board

Stock Market Crash 1929 Black Tuesday, October 29, Stockholders lost more than $40 billion dollars. By the end of 1930, America truly entered what is called the Great Depression. Dow Jones industrial average dropped over 12%. Result of mass panic selling of stocks, causing prices to plummet. Flood of sell orders provided stock prices to traders.

Bank Failures Reduction in Purchasing Throughout the 1930s over 9,000 banks failed. People who had their life savings in the banks – lost their money. Individuals from all classes stopped purchasing items. Reduced Production leading to reduction in Workforce. Unemployed were unable to pay installments on their items, which were ultimately repossessed. Unemployment rate rose above 25%.

American Economic Policy Government created the Smoot-Hawley Tariff in Charged a high tax for imports thereby leading to less trade between America and foreign countries. Drought Conditions Drought occurred in the Mississippi Valley in People could not even pay their taxes or other debts. Forced to sell their farms for no profit to themselves. The area was nicknamed "The Dust Bowl."

KEYNESIAN APPROACH ( ) Expansionary fiscal policies forced by the war had brought output back to potential by The U.S. entry into World War II led to much sharper increases in government purchases. It ended the Great Depression. By 1942, increasing aggregate demand had pushed real GDP beyond potential output.

Comparison between Recession 2008 & The Great Depression 1929

GDP AND LENGTH OF RECESSION AND DEPRESSION

Great DepressionGreat Recession Bank failures 9,096 – 50% of banks (Jan – March 1933) 57 – 0.6% of banks (Dec – May 2009) Unemployment rate25%8.5% Economic decline -26.5% ( ) -4.1% (Last quarter Second quarter 2009) Biggest decline in Dow Jones industrial average -89.2% (Sept. 3, 1929 – July 8, 1932) -53.8% (Oct. 9, March 9, 2009) Change in prices -25% (1929 – 1933) +0.5% (Dec March 2009) Emergency spending programs 1.5% of GDP for 1 year (Increase in 1934 budget deficit) 2.5% of GDP for 2 years (2009 American Reinvestment and Recovery Act) States responseRaise taxes, cut spending Federal stimulus plan gives fiscal relief to states to lessen impact of tax increases Increase in money supply by Federal Reserve 17% (1933) 125% (September 2008 – May 2009)

UNEMPLOYMENT

PRICES,INFLATION AND DEFLATION

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