Financial Crisis And The Great Depression - An Overview

The financial crisis started from the year 2008 in the United States. The financial crisis is also called the Global Recession or the Global Financial crisis. No doubt there are a lot of causes starting from high levels of market liquidity, where liquidity means performing economic actions like buying, selling, or paying debt, meeting immediate wants and needs. The other consequences are low cost of the capital and even safe investments returning very low yield. A home can be easily secured by installing a service like ADT Home Security System; however, we need to be very cautious while securing investments and returns. So as the demand for the investments increased, the banks started to lend mortgages, and then repackage and sell the underlying credit risk as securities with different levels of risk and return. This process was called as securitization. This was more common in the United States after 2004. In many cases banks did not understand the critical consequences of the loans getting repaid and led to more securitization.

More borrowers came in and created opportunities to frauds occurring more frequently. Many borrowers did not have the sufficient amount of income to make their payments. This was more among those who had adjustable rate mortgages, and the regulators did not have the sufficient capacity to follow these developments. Investing security products became more complex and the investor was judged based on the credit rating. Most often these credit ratings depicted a misleading picture of the quality of the underlying loans and the securities. The banks depended mainly on the short term funding. Since then, the financial crisis doesn't seem to end.

However, the Great Depression that prevailed during the year 1929-30's had even more severe effects than today's financial crisis in the United States. Millions of people lost their jobs, and many farmers and businesses were bankrupted. In the United States and Germany, the industrial output went down by almost 50% and this led to almost 35% of the industrial labor force getting unemployed. The US economy had financial excess and a rapid economic growth during this period. However, output continuously fell for nearly three years which effected the population. The agriculture experienced over productions and hence the prices of the agricultural products fell down, resulted in rising debts of the farmers. During this time a major banking crisis resulted in the 'Wall Street Crash' in October 1929. As a result, it aggravated the Federal Reserve Board to make serious mistakes in its policies and this reduced the money supply and contraction of the economy.

Germany after the First World War was burdened with debt. The Germans had to repair the after effects of the World War I and had to pay for the industrial reconstruction. It had to borrow large sums of money to pay the victorious European powers and signed the Treaty of Versailles in 1919. When the American economy fell into depression, the US banks recalled their money and caused the German banks to collapse. Slowly the depression spread rapidly around the world due to the flaws made by the government.

Today, the financial crisis has a similarity and a contribution from the government as well. However, the modern day economists have learnt a lot from the great depression and have a lot of comparisons with regard to the effects. Today's newspapers talk a lot about the financial crisis and measures taken to overcome. There are a lot of economic policies that are been implemented by government, financial sector, and in money markets to control the demand-pull and cost-push inflations and deflations which effect various sectors of the economy.