History Repeats Itself: The Great Depression and The Great Recession

Overview In the 1930's, the United States witnessed the greatest economic downturn that would prove to have a negative impact on the government, people, and morale of the nation. This nation experienced a very similar crash in late 2008, which some now call the Great Recession. Many wonder how these events in history even occur in the first place and what attributed to it. Through events in history, we can observe a myriad of different causes that resulted in the Great Depression and Recession, but one major concept stands out and that’s the idea of credit and failure to pay off loans.

Great Depression: Stock Market Mistakes

Both failures in the economy can be credited back to the decisions of the Federal Government and its citizens. During the 1920’s, banks were giving out loans freely to people because of the great state of the nation economically. Interest rates were kept low during the Roaring Twenties and because of the great economic times people were constantly using credit to buy materials and items they did not really have the money to spend. People started using this idea of loans and margins in the stock market, where they would take out a loan and pay it off through the profit they made in the marketplace. Essentially, they were buying stock without physical money in their pockets and rather on the guarantee that the stock would rise in value and gain them enough to pay back both the loan and obtain a profit. However, in 1929 the Federal Reserve decided to drastically increase interest rates. This created a constriction on investments and when the market crashed, people now did not have the money to pay off the massive loss and loans they owed. Banks were forced to foreclose homes and repossess from the people who owed money, but often times citizens would not have anything of equivalent value. This in turn caused the banks to go bankrupt and a downward spiral in the economy.

Great Recession: Housing Bubble

Many people can observe the same concept and build up in the Great Recession of 2008 that attributed to the crash in our generation. The changed variable in our crash was in the housing market, but the concept of the government and banks allowing loans to be given out to people to spend on items they could not necessarily afford is a repeat of history. During the early 2000’s, the housing market was in a rapid increase and many people were buying houses they could not afford because they believed the houses would only continue to rise in value. The idea here is people would live in a house for a couple years and later sell it a higher value in order to pay off the loans and gain profit. This concept was the identical mentality of Americans who played the stock market in the 1920’s. As history always repeats itself, when the housing bubble popped, many people panicked and foreclosed their homes. Banks and hedge funds who invested in the housing market now suffered catastrophic losses. Ultimately, a $700 billion bailout occurred in order to compensate for the myriad of bankruptcies that resulted from the crash. The country’s economic state was once again plummeting down and would continue until 2010.

Conclusion

The Great Depression and the irrational actions taken by Americans should have been a clear warning to future generations to never commit the same actions. However, it is evident through the Great Recession of our time that history does indeed repeat itself. Failure to learn from mistakes only creates future problems and America experiencing two similar events occur should be a red flag that people take note of in order to prevent this situation from ever happening again.


Source: http://www.fee.org/the_freeman/detail/comparing-the-great-depression-to-the-great-recession#axzz2nLw5IIHV