RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB, PATIALA

HISTORY PROJECT
PROJECT ON: A Comparative Analysis between The Great Depression of 1929 and the Economic Recession of 2008.

SUBMITTED TO: MRS. RACHNA SHARMA LECTURER OF HISTORY RGNUL, PATIALA SUBMITTED BY: ARUNIMA CHANDRA (507) KARAN SHARMA (517) SOHAM BANERJEE (527) OMKARESHWAR PATHAK (537) GROUP 7

CERTIFICATE BY THE CANDIDATES

We, the members of group 7 hereby declare that the entire project is result of bona fide research done by every member of the group under the guidance of Mrs. Rachna Sharma. Sources of Quotes and other intellectual property are recognized in the footnotes section and all books referred to are in the bibliography section. In the research done help of internet sources are used along with the books references and the websites used for reference are found in the webliography section.

ACKNOWLEDGEMENT
On the completion of this project it is our present privilege to acknowledge our profound `gratitude and indebtness towards our teacher Mrs. Rachna Sharma for helping us selecting books for this project as well as for making us understand the multiple aspects of this project and for her guidance and unrelenting support. We gratefully acknowledge our deepest sense of gratitude to our revered and intellectual guide Mrs. Rachna Sharma who had it the flame of interest and enthusiasm and saw to it that it kept lightning. She has helped us in guiding about the relevant and primary sources of this project.

We heartfully thank Ms Updesh Kaur and other library staff for their able guidance and support without which this project would not have been completed. We are also thankful to Mr. Indrapreet and other computer staff who helped us in operating computer and providing access to the internet in the college.

Last but not the least we are thankful to our family members and our friends for the affection and encouragement with which doing this project became a pleasure.

CONTENTS

1. INTRODUCTION ..5 2. THE GREAT DEPRESSION (1929-1933)... 7 3. MAJOR EFFECTS WORLDWID.11 4. GENERAL ANALYSIS OF THE GREAT DEPRESSION .......18 5. ECONOMIC RECESSION 2008.. ..19 6. MAJOR ECONOMIES AFFECTED BY THE RECESSION.24 7. CONDITION IN THE UNITED STATES.... 27 8. CONDITION IN EUROPE... .28 9. CONDITION IN INDIA .33 10. FACTORS THAT CAUSED THE GLOBAL RECESSION IN 2008.36 11. GENERAL ANALYSIS OF THE ECONOMIC RECESSION 2008 .....37 12. COMPARISONS WITH THE GREAT DEPRESSION IN THE U.S..41 13. EFFECTS ON ASIA...44 14. GENERAL EFFECTS WORLD WIDE46 15. ECONOMIC SLOW DOWN IN AFRICA48 16. HOW FAST THE WORLD CAME OUT OF BOTH THE ECONOMMICU DOWN TURN50 17. WHAT HAVE WE LEARNT FROM BOTH?52 18. WHAT HAVE WE LEARNT FROM RECESSION..54 19. CHINA AT THE CENTER...56 20. DOWNWORD SPIRAL.57 21. CONCLUSION58
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INTRODUCTION
The Great depression was a severe worldwide economic depression, in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries, it started in around 1927 and ended in late 1930s and early 1940s. It was the longest, most widespread, and deepest depression of the 20th century, and is used in the 21st century as an example of how far the worlds economy can decline. It started in the United Stated starting with the crash of the stock market on October 27, 1927 (known as black Tuesday), but quickly spread to almost every country of the world. The Great Depression had devastating effects in virtually every country, rich and poor. Personal income tax revenues, profits and prices dropped and international trade plunged by a half to two-thirds. Depression is a result of a recession which is running for a decade. Recession means when the Gross Domestic Product (GDP) of a country declines for two or more consecutive quarters of a year. Beginning in the United States in December (and with much greater intensity in September 2004, according to the National Bureau of Economic Research) the industrialized world has been undergoing recession, a pronounced deceleration of economic activity. This Global recession took in economic environment, characterized various imbalances and was sparked by the outbreak of financial crisis of 2008. The Great Depression had devastating effects on virtually every country, rich and poor. Unemployment rates in the United States rose to 25% and as high as 11% in some other nations. Cities around the world were hit hard, especially those dependant on heavy industries. Construction was virtually halted in many countries. In the recent global meltdown, the International Labor Organization (ILO) predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis-mostly in construction, real estate, financial services, and the auto sector-bringing world unemployment above 200 million for the first time. The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensified.

In December 2007, the US unemployment rate was 4.9%. By October 2009, the unemployment rate had risen to 10.2 %. A broader measure of unemployment (taking into account marginally attached workers, those employed part time for economic reasons, and discouraged workers) was 16.3%. Spains unemployment rate reached 18.7% (37% for youths) in May 2009-the highest in the Euro zone. In July 2009, fewer jobs were lost than expected, dipping the unemployment rate from 9.5% to 9.4%. Even fewer jobs were lost in August, 216,000, recorded as the lowest number since September 2008, but the unemployment rate rose to 9.7%. In October 2009, news reports announced that some employers who cut jobs due to the recession are beginning to hire them back. Things started getting better in late 2009 and job losses have almost stopped now in 2010. The rise of advanced economies like Brazil, India, and China increased the global labor pool dramatically. Improvements in communication and technology in these countries has allowed workers in these countries compete with the workers of the traditionally strong economies like the US. This huge surge in labor supply has provided downward pressure on wages and contributed to unemployment. What is Economic Depression? In general words, an economic depression is a severe economic downturn that lasts for several years. It is characterized by falling Gross Domestic Product (GDP) and high unemployment rates. The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) defines a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.1

Avialable at http://en.wikipedia.org/wiki/Depression_(economics) visited on 19/10/2010

CH 1. THE GREAT DEPRESSION (1929-1933)

Start of the Great Depression Some attribute the start of the Great Depression to the total collapse of US stock market prices on October 29, 1929, known as Black Tuesday. However some see the stock crash as a symptom, rather than a cause of the depression. Even after the Wall Street crash of 1929, optimism prevailed for some time; John D. Rockefeller said, These are days when many get discouraged. In 93 years of my life, depressions have come and gone. Prosperity has always returned and will again. The stock market turned upward in early 1930, returning to early 1929 levels by April, though almost 30% below the peak of September 1929. Together, government and business actually spent more in the first half of the 1930, than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by 10%, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930. By mid-1930, interest rates had dropped to low levels, but expected deflation and the reluctance of people to add new debt by borrowing, meant that consumer spending and investment were depressed. In May 1930, automobile sales had declined to below the levels of 19282. Prices in general began to decline, but waged held steady in 1930; but then a deflationary spiral started in 1931. Conditions were worse in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the US economy was the factor that pulled down most other countries at first, and then internal weaknesses or strengths in each country made conditions better or worse. Frantic attempts to show up the economies of individual nations through protectionist policies, such as the 1930 US Smoot & Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late 1930, a steady decline set in which reached bottom by March 1933.

Available at www.scribd.com visited on 21/10/2010

Causes There were multiple causes for the first downturn of 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists point to monetary factors such as actions by the US Federal Reserve that contracted the money supply, and Britains decision to return to Gold Standard at pre-World War I parities (US $ 4.86). Recessions and business cycles are thought to be normal part of living in a world of inexact balances between supply and demand. What turns a usually mild and short recession or ordinary business cycle into an actual depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eights decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part government efforts to regulate interest rates, curtail widespread bank failures, and control the money supply. Those who believe in the large role for the state believe it was mostly a failure of the free markets believe it was mostly a failure of the free markets and those who believe in free markets believe it was mainly failure of government that compounded the problem. Current theory may be classified into three main points of view. First, there are structural theories, most importantly Keynesian economies, but also including those who point to the breakdown of international trade, and Institutional economists who point to under consumption and overinvestment (economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The consensus viewpoint is that there was a large-scale loss of confidence that led to a sudden reduction in consumption and investment spending. Once deflation and panic set it, many people believed they could make more money by keeping clear of the markets as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand.

Second, there are monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve), caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression. Related to this depression are those who point to debt deflation causing those who borrow to owe ever more in real terms. Keynesian British economist, John Maynard Keynes argued in General Theory of Employment Interest and Money that lower aggregate expenditures in the economy contributed to a massive decline in the income and employment in the economy contributed to a massive decline in income and to employment that was well below average. In such a situation, the economy reached equilibrium at low levels of economic activity and high unemployment. Keynes basic idea was simple: to keep fully employed, government has to run deficits when the economy is slowing, as the private sector would not invest enough to keep the production at normal level and bring out the economy out of recession. Keynesian economists called on governments during times of economic crisis to pick up the slack increasing the government spending and/or cutting taxes. As the Depression wore on, Roosevelt tried public works, farm subsidies and other devices to restart the economy, but never completely gave up trying to balance the budget. According to the Keynesians, but Roosevelt never spent enough to bring the economy out of the recession until the start of World War II. New classical approach: a work from the neo-classical perspective focuses on the decline in productivity that caused the initial decline in output and a prolonged recovery due to policies that affected the labor market. This work, called the Kehoe and Prescott, decomposes the economic decline into a decline in the labor force, capital stock, and the productivity, relatively little change in the capital stock, and a prolonged depression in the labor force. The analysis rejects theories that focus on the role of savings and posit a decline in capital stock. Inequality of wealth and income: Two economists of the 1920s, Waddill Catchants and William Trufant Foster, popularized a theory that influenced many policy makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Mariner Eccles. It held that the economy

produced more than it consumed, because the consumers did not have enough income. Thus, the unequal distribution of wealth thoughout the 1920s caused the Great Depression. According to this view, the root cause of the depression was a global investment in heavy industry capacity compared to wages and earnings from independent businesses, such as farms. The solution was, the government must pump money into consumers pockets. That is, it must redistribute purchasing power, maintain the industrial base, but re-inflate prices and wages to force as much of the inflationary increase in purchasing power into consumer spending. The economy was overbuilt, and new factory were not needed. Foster and Catchings federal and state governments start large construction projects, a program started by Hoover and Roosevelt. Turning point and recovery Various countries around the world started to recover from the Great Depression at different times. In most countries of the world, recovery from the Great Depression began in 1933. In the United States, the recovery began in the spring of 1933. However, US did not return to 1929 GNP for over a decade and had the unemployment rate of about 15% in 1940, although down from the high 25% in 1933. There is no consensus among economists regarding the motive factor for the US economic expansion that continued through most of the Roosevelt years. According to Christina Romer, the money supply growth caused by huge international gold inflows was a crucial source of the recovery of the US economy, and that the economy showed a little sign of self-correction. The gold inflows were partly due to devaluation of the US dollar and partly due to deterioration of the political situation in Europe. In their book, a monetary history of the United States, Milton Friedman and Anna J. Schwartz also attributed the recovery to monetary factors, and contended that it was much slowed by poor management of money by the Federal Reserve System. Current chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important roles both in the worldwide economic decline and eventual recovery Bernanke also sees a strong role for institutional factors particularly the rebuilding and restructuring of the financial system and points out that the depression needs to be examined in international perspective.

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CH 3.MAJOR EFFECTS WORLDWIDE

Condition in The US During the Depression, unemployment was 25% and wages (for those who still had jobs) fell 42%. Total U.S. economic output fell from $103 to $55 billion and world trade plummeted 65% as measured in dollars.3 The Depression was aggravated by poormonetary policy. Instead of pumping money into the economy, and increasing the money supply, the Federal Reserve allowed the money supply to fall 30%. The "New Deal" created many government programs to end the Depression, but government programs alone could not end it. Unemployment remained in the double-digits until 1941, when the U.S. entry into World War II created defense-related jobs. The decline in the GDP growth rates were of a magnitude not seen since: 1. 1930 -8.6% 2. 1931 -6.4% 3. 1932 -13% 4. 1933 -1.3%.4 The US economic depression spells bad news for everyone. Businesses are struggling to make profits, forcing them to reduces wages and cut back on staff numbers. This causes unemployment rates to rise across the entire country. Work becomes much harder to find, and even people with spotless credit histories fail to make their loan repayments, leading to mass home repossessions. The hallmark of an economic depression is that there isnt enough money to keep the world turning. Desperate times call for desperate measures, and with many developed countries on the brink of a modern day depression, governments resort to printing more money. Ironically, this is what caused the credit crunch in the first place; global financial corporations borrowing billions of

AvaIlable at http://useconomy.about.com/od/grossdomesticproduct/f/Depression.htm visited on 21/10/2010 Available at http://useconomy.about.com/od/grossdomesticproduct/f/Depression.htm visited on 22/10/2010

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dollars from one another without the means to repay it. All they had to fall back on were their low risk investments which, due to poor government regulation were actually among the riskiest loans around. Condition in India During that period the country was under the occupation of the British Raj and the economic condition was totally destroyed by the English rulers. Hence there were no other extra effects on the Indian economy as it was already under crumbles. As extra effects the Indian economy was subjected as a pipe for supplying resource to Europe specially England for its survival. The majority of countries set up relief programs, and most underwent some sort of political upheaval, pushing them to the left or right. In some states, the desperate citizens turned toward nationalist demagoguesthe most infamous being Adolf Hitlersetting the stage for World War II in 1939. Australia Australia's extreme dependence on agricultural and industrial exports meant it was one of the hardest-hit countries in the Western world. Falling export demand and commodity prices placed massive downward pressures on wages. Further, unemployment reached a record high of 29% in 1932, with incidents of civil unrest becoming common. After 1932, an increase in wool and meat prices led to a gradual recovery.5 Canada Harshly affected by both the global economic downturn and the Dust Bowl, Canadian industrial production had fallen to only 58% of the 1929 level by 1932, the second lowest level in the world after the United States, and well behind nations such as Britain, which saw it fall only to 83% of the 1929 level. Total national income fell to 56% of the 1929 level, again worse than any

Avialable at http://www.wikipedia.org/depression visited on 10/11/2010 at 1.34 pm

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nation apart from the United States. Unemployment reached 27% at the depth of the Depression in 1933. During the 1930s, Canada employed a highly restrictive immigration policy.6 Chile Chile initially felt the impact of the Great Depression in 1930, when GDP dropped 14%, mining income declined 27%, and export earnings fell 28%. By 1932, GDP had shrunk to less than half of what it had been in 1929, exacting a terrible toll in unemployment and business failures. The League of Nations labeled Chile the country hardest hit by the Great Depression because 80% of government revenue came from exports of copper and nitrates, which were in low demand.7 Influenced profoundly by the Great Depression, many national leaders promoted the development of local industry in an effort to insulate the economy from future external shocks. After six years of government austerity measures, which succeeded in reestablishing Chile's creditworthiness, Chileans elected to office during the 193858 period a succession of center and left-of-center governments interested in promoting economic growth by means of government intervention. Prompted in part by the devastating earthquake of 1939, the Popular Front government of Pedro Aguirre Cerda created the Production Development Corporation (Corporacin de Fomento de la Produccin, CORFO) to encourage with subsidies and direct investments an ambitious program of import substitution industrialization. Consequently, as in other Latin American countries, protectionism became an entrenched aspect of the Chilean economy. France The Depression began to affect France around 1931. France's relatively high degree of selfsufficiency meant the damage was considerably less than in nations like Germany. However, hardship and unemployment were high enough to lead to rioting and the rise of the socialist Popular Front.

AvaIlable at http://useconomy.about.com/od/grossdomesticproduct/f/Depression.htm visited on 21/10/2010. Ibid.

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Germany "Diligent young man seeks work" Germany's Weimar Republic was hit hard by the depression, as American loans to help rebuild the German economy now stopped. Unemployment soared, especially in larger cities, and the political system veered toward extremism. The unemployment rate reached nearly 30% in 1932. Repayment of the war reparations due by Germany were suspended in 1932 following the Lausanne Conference of 1932. By that time, Germany had repaid of the reparations. Hitler's Nazi Party came to power in January 1933. Japan The Great Depression did not strongly affect Japan. The Japanese economy shrank by 8% during 192931. However, Japan's Finance Minister Takahashi Korekiyo was the first to implement what have come to be identified as Keynesian economic policies: first, by large fiscal stimulus involving deficit spending; and second, by devaluing the currency. Takahashi used the Bank of Japan to sterilize the deficit spending and minimize resulting inflationary pressures. Econometric studies have identified the fiscal stimulus as especially effective. The devaluation of the currency had an immediate effect. Japanese textiles began to displace British textiles in export markets. The deficit spending, however proved to be most profound. The deficit spending went into the purchase of munitions for the armed forces. By 1933, Japan was already out of the depression. By 1934, Takahashi realized that the economy was in danger of overheating, and to avoid inflation, moved to reduce the deficit spending that went towards armaments and munitions. This resulted in a strong and swift negative reaction from nationalists, especially those in the Army, culminating in his assassination in the course of the February 26 Incident. This had a chilling effect on all civilian bureaucrats in the Japanese government. From 1934, the military's dominance of the government continued to grow. Instead of reducing deficit spending, the government introduced price controls and rationing schemes that reduced, but did not eliminate inflation, which would remain a problem until the end of World War II.

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The deficit spending had a transformative effect on Japan. Japan's industrial production doubled during the 1930s. Further, in 1929 the list of the largest firms in Japan was dominated by light industries, especially textile companies (many of Japan's automakers, like Toyota, have their roots in the textile industry). By 1940 light industry had been displaced by heavy industry as the largest firms inside the Japanese economy. Latin America Because of high levels of U.S. investment in Latin American economies, they were severely damaged by the Depression. Within the region, Chile, Bolivia and Peru were particularly badly affected. Netherlands From roughly 1931-1937, the Netherlands suffered a deep and exceptionally long depression. This depression was partly caused by the after-effects of the Stock Market Crash of 1929 in the U.S., and partly by internal factors in the Netherlands. Government policy, especially the very late dropping of the Gold Standard, played a role in prolonging the depression. The Great Depression in the Netherlands led to some political instability and riots, and can be linked to the rise of the Dutch national-socialist party NSB. The depression in the Netherlands eased off somewhat at the end of 1936, when the government finally dropped the Gold Standard, but real economic stability did not return until after World War II Buried machinery in a barn lot; South Dakota, May 1936. The Dust Bowl on the Great Plains coincided with the Great Depression. South Africa As world trade slumped, demand for South African agricultural and mineral exports fell drastically. The Carnegie Commission on Poor Whites had concluded in 1931 that nearly of Afrikaners lived as paupers. It is believed that the social discomfort caused by the depression was a contributing factor in the 1933 split between the "gesuiwerde" (purified) and "smelter"

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(fusionist) factions within the National Party and the National Party's subsequent fusion with the South African Party. Soviet Union Removed itself from the capitalist world system both by choice and as a result of efforts of the capitalist powers to isolate it, the Great Depression had little effect on the Soviet Union. A Soviet trade agency in New York advertised 6,000 positions and received more than 100,000 applications Its apparent immunity to the Great Depression seemed to validate the theory of Marxism and contributed to Socialist and Communist agitation in affected nations. Many Western intellectuals, like New York Times reporter Walter Duranty, looked upon Soviet Union with sympathy, either ignorant of or ignoring reports about the Holodomor that killed millions of people. United Kingdomn The effects on the northern industrial areas of Britain were immediate and devastating, as demand for traditional industrial products collapsed. By the end of 1930 unemployment had more than doubled from 1 million to 2.5 million (20% of the insured workforce), and exports had fallen in value by 50%. In 1933, 30% of Glaswegians were unemployed due to the severe decline in heavy industry. In some towns and cities in the north east, unemployment reached as high as 70% as ship production fell 90%. The National Hunger March of SeptemberOctober 1932 was the largest of a series of hunger marches in Britain in the 1920s and 1930s. About 200,000 unemployed men were sent to the work camps, which continued in operation until 1939. In the less industrial Midlands and South of England, the effects were short-lived and the later 1930s were a prosperous time. Growth in modern manufacture of electrical goods and a boom in the motor car industry was helped by a growing southern population and an expanding middle class. Agriculture also saw a boom during this period. 8

Hadely carlisle UK World records oxford university press 1998,Pg.73.

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When and how world came out of it? There are a couple different reasons how America got out of the great depression. First, the New Deal presented by Franklin D. Roosavelt helped give americans jobs. In the New Deal the government basically created jobs for the Americans who needed them. Second, World War II. World War II also helped because it created even more jobs. Thousands of men could just enlist for the army. Though by the time World War II came around, America was already out of the worst of the great depression. World War II was more of an event that officially marked the end of the Great Depression. Their is one main reason why the US came out of the Great Depression. Roosevelt's New Deal programs were clever, but they were not working.9 The reason that we came out of the Great Depression is because of World War 2. We were already out of the depression, because we had been selling supplies to the allies as they fought the war. If we had joined the war sooner we would not have come out of the Great Depression sooner.

Hadely carlisle UK World records oxford university press 1998,Pg.73.

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CH 4. GENERAL ANALYSIS OF THE GREAT DEPRESSION

The crisis had many political consequences, among which was the abandonment of classic economic liberal approaches, which Roosevelt replaced in the U.S. with Keynesian policies. These policies magnified the role of the federal government in the national economy. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. The Great Depression was a main factor in the implementation of social democracy and planned economies in European countries after World War II. (see Marshall Plan). Although Austrian economists had challenged Keynesianism since the 1920s, it was not until the 1970s, with the influence of Milton Friedman that the Keynesian approach was politically questioned This was the more or less picture of the entire depression hit world10

10

Avialable at http://www.USA.gov.com visited on 4/11/ 2010

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CH5. ECONOMIC RECESSION 2008

Introduction In late 2008, a number of universal indicators suggested that the world was in a global downturn. These factors, when combined with the current financial crisis (see Start of the Financial Crisis (2008)), have created devestating recessions in a number of world powers. As of December 2008, the National Bureau of Economic Research (NBER), reported that the United States had been in an economic recession since the previous December. What is a Recession? In economics, recession refers to the reduction in a country's Gross Domestic Product (GDP) for at least two business quarters. There are a number of signs that a recession might be happening, or about to happen. This includes a significant drop in prices on the stock markets, such as the price drops caused by the 2008 Global Financial Crisis which the world is still reeling from.11 There are a number of ways to respond to a recession. These are at both government and business levels and can involve tax cuts, or in some cases not doing anything at all. This is known as 'Laissez-Faire' and is done under the idea that at some point, the problem will sort itself out. What Caused the Modern US Recession? As the credit crunch put pressure on banks to run their day-to-day business, unemployment rates rose and even people with clean credit histories began struggling to repay their mortgages. The global stock markets reacted by plummeting around 40% during 2008. Many analysts now agree that the US is on the brink of an economic depression during 2009 and that there is no quick fix.12

11 12

Avialable at www.suite101.com/.../global-recession-in-the-late-2000s-a88942 visited on 11/11/10 Avialable at http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010 visited on 11/11/10

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In January 2008, the US Federal Reserve slashed interest rates from 4.25% to 3.5% the biggest overnight cut in more than 25 years. Investment analysts stated the move was an act of obvious panic after the global stock market slump. All of this was spurred by the subprime crisis and the billions of dollars lost in the credit markets. Over the course of a day (when the US was on holiday), stock markets across Asia and Europe plummeted, with the FTSE 100 losing the most in a single day since the terrorist attacks of 9/11. The global declines also came after George Bushs attempt to inject $145 billion into the US economy to stave off a recession. The Subprime Crisis The US subprime crisis is a term used to describe high risk loans, offered to people with poor credit histories and who are more likely to default on their repayments. The subprime sector hit a crisis point when house values declined, leaving massive levels of unpaid credit to be accounted for. The threat of economic recession was centered on the massive slump in the US subprime housing market over the year 2008. While mortgage rates were rising, home loan defaults and repossessions hit record levels, predominantly in the subprime sector.13 The Global Credit Crunch It was not just mortgage providers that were left out of pocket. A lot of the subprime debt was repackaged into complex investment products, and sold on to other banks and investors all over the world. When these investments collapsed, it had a host of knock-on effects on the world credit markets.14 The cost of obtaining credit became much higher because of the higher risk of default. Business and personal loan applicants will face intense scrutiny and costly repayment plans.

13

Jaydeb Sharkel, Macroeconomics theory, 2006,Book Syndicate, Kolkata, pg.34 Available at, www.wikianswers.com, visited on 10th November 2010

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Prior to the stock market slump, analysts at the investment bank Morgan Stanley released a report entitled Recession Coming, which detailed how the credit crunch had started to inflict serious damage on US companies. Slipping sales and tightening credit are pushing companies into liquidation mode, the report said. It also highlighted that LIBOR spreads (the rate at which banks lend money to each other) had rocketed, and that the declining job market could now be buckling. When the markets were seemingly calm, the bank pointed out that consumers potentially faced a perfect storm. And now that storm has started to hit. Fellow investment banks Goldman Sachs and Lehman Brothers agreed that Asia and Europe could no longer come to the rescue. The whole world was feeling the impact of the US subprime crisis and the credit crunch. Analysts believed that the Federal Reserve will have to cut interest rates down to as little as 1% by the end of the year, in order the curb the impact of this credit crunch nightmare.

Therefore, during 2008, the US was plunged into an economic recession caused by a massive slump in Americas subprime housing market. While mortgage rates were rising, home loan defaults and repossessions hit an all time high, mainly in the subprime sector. But it was not just the mortgage lenders that were left out of pocket. Much of the subprime debt was repackaged and sold to other banks and investors around the world, being branded as low risk AAA investments. Nothing could have been further from the truth. So when these investments collapsed, the banking industry was stunned, and the world credit markets seized up overnight. Where did the recession hit initially? The recession started of in the US as the real estate sector felt an acute crisis in the economic field and as banking major Lehman bros. registered for Bankruptcy. More over as other major

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US corporate houses like Citi bank and General Bros registered for Bankruptcy the recession was declared alive and kicking.15 Effected countries Many countries experienced recession in 2008. The countries/territories currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy, Russia and Germany. Denmark went into recession in the first quarter of 2008, but came out again in the second quarter. Iceland fell into an economic depression in 2008 following the collapse of its banking system. The following countries went into recession in the second quarter of 2008:

Estonia, Latvia, Ireland and New Zealand. The following countries/territories went into recession in the third quarter of 2008: Japan, Sweden, Hong Kong, Singapore, Italy, Turkey and Germany. As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter, and the United Kingdom. In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter. The following countries/territories went into technical recession in the fourth quarter of 2008: United States, Switzerland, Spain, and Taiwan. South Korea "miraculously" avoided recession with GDP returning positive at a 0.1% expansion in the first quarter of 2009. Of the seven largest economies in the world by GDP, only China and France avoided a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. 16 This is interesting as China has until recently considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[100] This figure may more accurately be considered to be 57% now that the main growth in working population is receding. Growth of between 5%8% could well have

15 16

Dutt and Sundaram, Indian Economy 2004, S. Chand, new Delhi, pg. 74. ibid. pg. 67.

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the type of effect in China that a recession has elsewhere. Ukraine went into technical depression in January 2009 with a nominal annualized GDP growth of 20%. The recession in Japan intensified in the fourth quarter of 2008 with a nominal annualized GDP growth of 12.7%, and deepened further in the first quarter of 2009 with a nominal annualized GDP growth of 15.2%.

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CH6. MAJOR ECONOMIES AFFECTED BY THE RECESSION.

Country Poland Australia Israel Norway South Africa Cyprus Switzerland Canada New Zealand France Portugal United States Chile Belgium Korea, South Total GDP loss -0.33% -0.73% -1.09% -2.75% -2.79% -2.93% -3.32% -3.36% -3.40% -3.88% -3.88% -4.14% -4.16% -4.23% -4.58% Recession length (number of quarters) 1 1 2 6 3 5 4 6 5 4 4 6 4 3 2 3 7 4 5 6 4

Czech Republic -4.87% Spain Austria Netherlands Greece Germany -4.89% -5.13% -5.19% -5.40% -5.94%

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United Kingdom -6.39% Italy Denmark Slovakia Sweden Hungary Japan Luxembourg Mexico Finland Romania Slovenia Russia Bulgaria Turkey Iceland Ireland Lithuania Estonia
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6 7 6 1 5 6 4 5 4 7 7 3 4 5 4 8 8 7 7

-6.76% -7.32% -7.38% -7.68% -7.85% -8.67% -8.68% -9.06% -9.51% -9.65% -9.71% -10.78% -11.94% -12.84% -12.91% -14.26% -18.04% -19.63%

17

Available at www.wikipedia.com visited on 6 Nov 2010

th

25

During recession sub prime loans came under immense limelight and turned out to be an excellent option for the banks. Many big investors bought such loans from the original lenders thus helping lenders with fresh funds to raise again. These investors were not only from America but also from the other parts and as a result the phenomenon remained no more confined to the U.S. The limelight of the loans remained until the prices soared. But as soon as there saw a decline, loans became unbeneficial and dicey.18

Investors from all over the world who took loans faced major losses. These losses trickled down to other banks that were in chain with the international banks of America who formed the backbone of many banks. As the banks were left with no money, the major industries and companies worldwide that depended on loans from these banks for their activities faced closure. The recession became hazardous for the world market soon.

18

Available at http://en.wikipedia.org/wiki/Late-2000s_recession#Countries_in_economic_recession_or_depression

visited on 11th November 2010.

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CH7. CONDITION IN THE UNITED STATES

the current recession is unquestionably severe, it pales in comparison with what our parents and grandparents experienced in the 1930s. Last Fridays employment report showed that

unemployment in the United States has reached 8.1%a terrible number that signifies a devastating tragedy for millions of American families. But, at its worst, unemployment in the 1930s reached nearly 25%.1 And, that quarter of American workers had painfully few of the social safety nets that today help families maintain at least the essentials of life during unemployment. Likewise, following last months revision of the GDP statistics, we know that real GDP has declined almost 2% from its peak. But, between the peak in 1929 and the trough of the great Depression in 1933, real GDP fell over 25% While this recession is less severe than the Great Depression, there are parallels that make it a useful point of comparison and a source for learning about policy responses today. Most obviously, like the Great Depression, todays downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions. In 1929, the collapse and extreme volatility of stock prices led consumers and firms to simply stop spending.3 In the recent episode, the collapse of housing prices and stock prices has reduced wealth and shaken confidence, and led to sharp rises in the saving rate as consumers have hunkered down in the face of greatly reduced and much more uncertain wealth This, in turn, had two devastating consequences: a collapse of the money supply, as stressed by Milton Friedman and Anna Schwartz, and a collapse in lending, as stressed by Ben Bernanke.5 In the current episode, modern innovations such as derivatives led to a direct relationship between asset prices and severe stress in financial institutions.19 Over the fall, we saw credit dry up and learned just how crucial lending is to the effective functioning of American businesses and households.

19

Hadely carlisle UK World records oxford university press 1998,Pg.73.

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CH8. CONDITION IN EUROPE

Portugal While in Greece the key issue is fiscal indiscipline, in Spain a credit-fuelled housing boomturned-bust, similarly in Ireland but coupled with an outsized banking sector, Portugal faces various structural deficiencies. The upshot is that the rebalancing in Portugal has an inherently structural nature and is unlikely to correct very easily and quickly, e.g., the current account deficit is still in double-digit territory. This is a reason for concern. So is the accumulation of external debt.The fiscal situation is only a by-product. Yet, while sudden shocks to the economy seem more unlikely in Portugal than elsewhere, the main risk is contagion. If markets behave in systematic mode' and continue to associate the current difficulties in Portugal with, say, those in Ireland or Greece, access to funding might dry up to such an extent that Portugal too might not be able to avoid going to the EFSF eventually. In Portugal, the minority government has already secured initial support from the opposition on the 2011 budget. The government has announced tougher and specific spending cuts. Overall, the belt-tightening measures represent savings of 3% of GDP, with the biggest focus on spending cuts (about two-thirds of the total). The goal is to bring the budget deficit down from an expected 7.3% of GDP this year to 4.6% in 2011. These targets seem broadly achievable, but only if all the measures are implemented swiftly and fully. The main risks relate to execution, especially in the context of a likely double-dip next year. After an expansion of 1.3% in 2010 on our projections, we expect growth to enter negative territory once again and foresee an economic contraction of the same order of magnitude in 2011. While social cohesion is quite tight in Portugal and the number of workdays lost due to strikes compares favourably with other EMU countries - including some at the core of the euro area investors will scrutinise any fiscal slippage, political tensions and social frictions to a great degree, in our view.20

20

Avialable at www.portugal.gov.pt visited on 10th nov 2010.

28

Russian Federation The 20082009 Russian financial crisis, part of the world Economic crisis of 2008, was a crisis in the Russian financial markets as well as an economic recession that was compounded by political fears after the war with Georgia and by the plummeting price of Urals heavy crude oil, which lost more than 70% of its value since its record peak of $147 on 4 July 2008 before rebounding moderately in 2009. According to the World Bank, Russias strong shortterm macroeconomic fundamentals made it better prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses and high dependence on the price of a single commodity made its impact more pronounced than would otherwise be the case. In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been wiped off the value of Russia's shares, although Russian stocks rebounded in 2009 becoming the worlds best performers, with the Micex index having more than doubled in value and regaining half its 2008 losses. As the crisis progressed, Reuters and the Financial Times speculated that the crisis would be used to increase the Kremlin's control over key strategic assets in a reverse of the "loans for shares" sales of the 1990s, when the state sold off major assets to the oligarchs in return for loans. In contrast to this earlier speculation, in September 2009 the Russian government announced plans to sell state energy and transport holdings in order to help plug the budget deficit and to help improve the nation's aging infrastructure. The state earmarked about 5,500 enterprises for divestment and plans to sell shares in companies that are already publicly traded, including Rosneft, the countrys biggest oil producer. 21 From July 2008-January 2009, Russia's foreign exchange reserves (FXR) fell by $210 billion from their peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp devaluation of the ruble. The ruble weakened 35% against the dollar from the onset of the crisis in August to January 2009. As the ruble stabilized in January the reserves began to steadily grow again throughout 2009, reaching a year-long high of $452 billion by year's-end.
21

Robert Frank Ben Bernanke, Principle of Macroeconomics 1998, McGraw Hill, New Delhi. Pg. 65

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Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record negative growth. GDP contracted by 7.9% for the whole of 2009, slightly less than the economic ministry's prediction of 8.5%. Experts expect Russia's economy will grow modestly in 2010, with estimates ranging from 3.1% by the Russian economic ministry to 2.5%, 3.6% and 4.9% by theWorld Bank, IMF, and OECD respectively.22

Greece : went bankrupt Greece requested financial support but its deteriorating economic and fiscal fundamentals alone are not enough a reason. Indeed, when Greece applied for financial support in April, not even 1Q GDP growth was known to policymakers, market participants and economic agents. And, at that point in time, the magnitude of the latest reported economic contraction in 4Q09 (-0.8%Q) was far smaller than that in the euro area (-1.8%Q) - where the recession started earlier. Similarly, the public finance figures have been revised multiple times since, and do now show a much more worrying picture than initially reported. This is not to say that there was no sign of impending deterioration in the outlook. Of course, more forward-looking (e.g., economic sentiment) or high-frequency (e.g., industrial production) indicators had already started to show some divergence between the growth path in Greece and the euro area as a whole. But, back then, the near-term trajectory did not seem to be that different in Greece relative to other EMU peripherals. What's more, Greece had announced just part of the belt-tightening it eventually ended up implementing. Debt sustainability is not the issue either. Although, Greece's long-term funding model was not viable, but the fact is that the market was willing to buy Greek bonds and provide funding even in the few months (and indeed weeks and days) before the crisis. While it was getting increasingly more expensive for Greece - but from a fairly low interest rate level - for quite a while there was a price the bond market was comfortable with.23

22

Robert Frank Ben Bernanke, Principle of Macroeconomics 1998, McGraw Hill, New Delhi. Pg. 65 Ibid 22,at Pg.79.

23

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Rather, it is an observation that broad market conditions - coupled with negative newsflow - can push a country towards a credit event (e.g., restructuring, default, etc.) regardless of whether economic conditions warrant such event. Before the European governments and the IMF stepped in to save Greece back in April, Greek (and international) markets were severely disrupted. In particular, the short-end segments of sovereign credit curves (e.g., 2s5s) were inverted in virtually all EMU peripheral countries - as well as in countries in between' such as Italy. Another sign of market stress - connected with the curve inversion mentioned above - was that interest rates rose rapidly over a very short timeframe. For example, the 10y yield on Greek bonds virtually doubled, rising from 5% to 10% within 48 hours. These dynamics were probably exacerbated by Greece's debt investor base, i.e., with two-thirds of the bonds held outside of the country, that resulted in a foreign buyer's strike, as overseas investors found it increasingly difficult to read the situation - the home bias works to the detriment of the country. Put differently, regardless of further falls in bond prices, making them attractively valued, there was no buyer around. Similarly, the stock market was considerably under stress back in April. In Greece, both the general index and bank stocks were experiencing continued downward pressure and, at that point in time, it seemed that bank deposits were decreasing month after month - thought this trend turned out to be short-lived. Further, it was not clear, over last spring, whether social unrest would have ensued on a large scale (it didn't - at least so far).24 Finally, there was skepticism on whether the government had the political will to address the various structural deficiencies, and uncertainty about the reliability of the public finance figures and the state of local governments (which, it turns out, account for just 1% of total debt in. All this contributed to negative news flow that fuelled market jitters.

24

Available at http://www.morganstanley.com/views/gef/index.html visited on 10th november 2010

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Ireland In Ireland, the financial crisis has indeed started to take a toll on the government's political support. Initially, Prime Minister Cowen's coalition started out with a clear majority in the Dail. But in the upcoming budget vote on December 7, it will have to rely on the support of the independent members of parliament. A total of four seats in the Dail are vacant at the moment and the High Court has recently ruled that by-elections need to be held as soon as possible. In reaction, the government has announced that it will hold one by-election in Donegal South-West on November 25, just a few days ahead of the presentation of the detailed 2011 budget on November 28. Depending on the outcome of this by-election, it might become more difficult to get the budget passed. In our view, markets will likely be nervously watching the political debate in Ireland in the run-up to the budget vote. On balance, we expect the budget to pass, but it could turn out to be a cliffhanger.25

25

AvaIlable at http://useconomy.about.com/od/grossdomesticproduct/f/Depression.htm visited on 21/10/2010

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CH9. CONDITION IN INDIA

The effects it had on India were:

1) share markets were falling: If our share markets ever touched new heights, it was due to investments from international banks. Now that- due to recession banks- faced shortage of liquidity; they started to withdraw their investments from India.

2) The Indian currency got weakened against dollar: Before recession, banks continued to buy stock from India but now they are selling. The same stock thus converting Rupee into Dollars and weakening our currency.

3) Banks faced huge shortage of funds and soon collapsed: As banks kept giving loans and funds at reasonable terms. At the end of the day, they were left with nothing.

Comparatively, India faced much lesser effects of this hazard. On the other hand, Iceland has become completely bankrupt and a country such as America is under a dreadful shock. Worlds greatest banks suffered losses and thousands of people lost their jobs. Statistics say 4000 jobs cut at Motorola, 100 at Google, Louis Vuitton cancelled the idea of setting up a mega store in Tokyo, Chanel have put down 200 staff in Paris and many other huge companies have done the same. Banks are short of money and capacity to run huge stuff has become impossible.

Recession is not something to deal with easily. Major economies and renowned economists are looking forward to solutions.

Nobel Prize winner Paul Krugman said up to $5 trillion money can expedite recovery from recession and projects such as Freight rail could bring fast money. Many more solutions have been talked about but things will not recover soon. In case all turns out to be in vain, time is the greatest healer. Lets wish time moves faster than ever expected and the wound gets healed soon. At the end I would like to share a phrase I read somewhere on net that says Recession is Greed of some, woes of Billions.
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As a consequence of the global liquidity squeeze, Indian banks and corporates have found their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. 500,000 people were rendered jobless between October to December 2008. Eight major sectors like textile and garment industry, metals and metal products, Information Technology and BPO, automobiles, gems & jewellery, transportation, construction and mining industries were included in the survey by the ministry of Labour and Employment. Inflation in India had turned negative for the first time in more than 30 years, official figures had shown. 30-50% of the business in garment industry has fall exports have fallen by a much higher 4.8% as compared to the other sectors and there are a number of job losses too. However, against all odds, India has managed to achieve 6.1 % GDP (Gross Domestic Product) growth in the first quarter (April- June) of the fiscal year. This makes India the second fastest growing major economy after China. Much of this can be attributed by the consumer confidence investors had in the Indian markets even through these bad times. According to the Nielsen Global Consumer Confidence, which polled 26,000 consumers across the globe, India ranks foremost in consumer confidence as investors have been safeguarded by Indias relatively nascent financial markets.26 Secondly and importantly it was the conservative policies adapted by the Indian Banking system which kept India relatively protected from the impact of the recession. New York Times credits the tough lending standards Y.V Reddy imposed on the Indian banks as RBI (Reserve Bank of India) Governor for saving the entire Indian baking system from the massive sub-prime and liquidity crisis of 2008 and beyond. As Governor, he saw his job as making sure Indian banks did not get too caught up in the bubble mentality. He banned the use of bank loans for the purchase of raw land, and sharply curtailed securitizations and derivatives, and essentially prohibited off-balance sheet financing.27 Saving for the future instead of spending on short- term desires is a tendency imbibed in the psyche of the Indian masses. Before thinking at an individual level, the expenditure is always thought collectively in terms of family which makes the entire money- making system unique in India. The government too works on the principle of welfare of the people rather than profit26 27

Available at http://www.wikipedia.en.com visited on 9/11/2010 Ibid 26.

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making. It is this element of the Indian culture maybe which has saved it from the affinity towards insatiability and self-interest prevailing in the West which further facilitated the common objective of working together in times of crisis. For the past two years, the number of youngsters opting for education abroad has fallen drastically. They have become aware of the inimitable opportunities they can get in India itself, thus instigating the idea of giving their inputs towards the development of their OWN country rather than draining their calibre for another one. Even though the crisis slowed the rate of growth of the economy in the country, it has given a message to the world of the resilience power the economy can manifest in times of adversity.28

28

Jaydeb Sarkhel, Macroeconomics Theory 2006, Book Syndicate, Kolkata, pg. 43.

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CH10. CAUSED THE GLOBAL RECESSION IN 2008FACTORS THAT

Since 2000, the world has seen the prices of primary consumer products rise, but in 2008 they reached such high prices that they were causing actual damage to the world economy and even threatening to reverse globalization. In early 2008, oil prices reached and passed the major milestone of $100 per barrel and peaked in July at $147.30. Such high prices caused a severe drop in demand and by the end of 2008, it cost just $35 per barrel of oil. Trade also suffered considerably in 2008, with the Baltic Dry Index (a measure of world shipping volume) dropping by 50% in just one week in mid-October. This has been blamed on the credit crunch, which made it hard for shipping merchants to obtain Letters of Credit. In February 2008, Reuters.com announced that global inflation was at an all-time high, blaming the excess of money, the financial crisis and growing demand for commodities as probable causes for such high inflation. The International Labour Organisation reported that by the end of 2009, 20 million jobs had been lost because of the global financial crisis, bringing the world's unemployment figure above 200 million for the first time ever. There is no way to predict when the current global recession will end, but world governments acted immeditately when the recession hit-new policies were made and bail out plans were put into action.29

29

Avialable at http://www.scribd.com visited on 9 nov 2010

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CH11.

GENERAL

ANALYSIS

OF

THE

ECONOMIC

RECESSION 2008
It took the statisticians of the National Bureau of Economic Research almost a year to confirm what the rest of us already knew, that the US registered a significant decline in economic activity, thus officially entering a period of recession. While I am pleased that the members of NBER take their duties seriously, thereby ensuring that they dont leap to any hasty conclusions, I only wish that similar moderation could be displayed by their colleagues at the Fed and the Treasury.30 Unfortunately, the facts prove otherwise. Three months before the recession was officially declared, Paulson and Bernanke have embarked on the largest bailout program ever conceived with the blessing of a lame-duck president and a complicit Congress a program which so far will cost taxpayers $8.5 trillion. This staggering sum encompasses: loans backed by worthless assets ($2.3T), equity investments in bankrupt companies with negative net worth ($3.0T), and guarantees on crumbling derivatives and other hollow collateral ($3.2T).

31

30 31

Available at http://www.USA.gov.com visited on 4 nov 2010. th Available at http://www.USA..gov.in visited on 4 nov 2010

th

37

Back in September people were stunned to make the support of Congress for a $700 billion bailout package (more than the total war spending in Iraq to date). While manu realized that their compatriots have been running large credit card balances and interest-only mortgages with little thought as to how they would repay their debt, one would expect a little more restraint when dealing with the financial future of the largest economy in the world. Operating under the assumption that our largest financial institutions are too big to fail, in the span of a few weeks we went from pledging to spend $1 trillion to $3 trillion a commitment which then grew to $5 trillion before ballooning to a staggering $8.5 trillion. At the rate we are going, we will be dealing with double digits in trillions- before the end of the year. Was the official statement from the US govt.And while all off that money is not yet spent, make no mistake these are real commitments with serious liabilities attached to them. The government prepared for paying large premium. What is the real value of Citicorp or AIG? Since they are quasi-bankrupt (and would be totally bankrupt without massive injections from the Fed), a reasonable businessperson might pay a token price for their equity and the assumption of their enormous liabilities. Before doing so however, a buyer would have to see some significant value in buying these entities as a continuing business. In most cases, a buyer would not want to assume the companys liabilities but would prefer to buy selective unencumbered assets in a bankruptcy proceeding. Any money our government pays above what a reasonable person would pay in an arms-length transaction is real spending and should more accurately be called a grant. While defenders of the too-big-to-fail policies argue that providing guarantees is not the same as granting money, the reality is that these guarantees are necessary to prevent the collapse of financial institutions currently lacking the necessary collateral to meet their loan covenants. Should their loans be called, we could actually find out the real value of their assets. The fact is that in-spite of Paulsons and Bernankes efforts, deleveraging is already happening. Although at a slower pace, one asset class after another is being adjusted down towards its intrinsic value, which is usually not much. Make no mistake; many of these guarantees will eventually be called
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in by lenders. In due time, unless our government is able to inflates its way out of this bottomless pit, it will have to honor most of these guarantees. So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception? To try and grasp the enormity of this figure, lets look at some other financial commitments undertaken by our government in the past:

32

As illustrated above, one can see that in todays dollar, the Us had already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution. Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars. The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!33

32

Dutt and Sundaram , Indian Economy 2006, S. Chand, New Delhi, pg.34.

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In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks. The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion. In its fifty or so years of existence, NASA has only managed to spend $885 billion a figure which got us to the moon and beyond.34 The New Deal had a price tag of only $500 billion. The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars. The cost of fixing the S&L crisis was $235 billion. The best deal ever for a government program was the Louisiana Purchase, a deal with the French that gave us 23% of the surface of todays US for only $15 million ($284 million in todays dollars). Why couldnt Paulson and Bernanke display the financial acumen of a Thomas Jefferson? The debt calculator of US reached 11billion$.

34

Avialable at http://www.scribd.com visited on 7 nov 2010

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CH12. COMPARISONS WITH THE GREAT DEPRESSION IN THE UNITED STATES

Although some casual comparisons between the late-2000s recession and the Great Depression have been made, there remain large differences between the two events. The consensus among economists in March 2009 was that a depression was not likely to occur. UCLA Anderson Forecast director Edward Leamer said on March 25, 2009 that there had not been any major predictions at that time which resembled a second Great Depression: "We've frightened consumers to the point where they imagine there is a good prospect of a Great Depression. That certainly is not in the prospect. No reputable forecaster is producing anything like a Great Depression." Differences explicitly pointed out between the recession and the Great Depression include the facts that over the 79 years between 1929 and 2008, great changes occurred in economic philosophy and policy, the stock market had not fallen as far as it did in 1932 or 1982, the 10year price-to-earnings ratio of stocks was not as low as in the '30s or '80s, inflation-adjusted U.S. housing prices in March 2009 were higher than any time since 1890 (including the housing booms of the 1970s and '80s), the recession of the early '30s lasted over three-and-a-half years, and during the 1930s the supply of money (currency plus demand deposits) fell by 25% (where as in 2008 and 2009 the Fed "has taken an ultraloose credit stance"). Furthermore, the unemployment rate in 2008 and early 2009 and the rate at which it rose was comparable to most of the recessions occurring after World War II, and was dwarfed by the 25% unemployment rate peak of the Great Depression. Stock market Price-to-earnings ratios have yet to drop as low as in previous recessions. On this issue, "it is critically important, though, to recognize that different analysts have different earnings expectations, and the consensus view is more often wrong than right." Some argue that price-toearnings ratios remain high because of unprecedented falls in earnings.

41

Market strategist Phil Dow "said he believes distinctions exist between the current market malaise" and the Great Depression. The Dow's fall of over 50% in 17 months is similar to a 54.7% fall in the Great Depression, followed by a total drop of 89% over the next 16 months. "It's very troubling if you have a mirror image," said Dow. Floyd Norris, chief financial correspondent of The New York Times, wrote in a blog entry in March 2009 that the decline has not been a mirror image of the Great Depression, explaining that although the decline amounts were nearly the same at the time, the rates of decline had started much faster in 2007, and that the past year had only ranked eighth among the worst recorded years of percentage drops in the Dow. The past two years ranked third however. Unemployment The chief economist of the I.M.F., Dr. Olivier Blanchard, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in 1928-1929. Three years into the Great Depression, unemployment reached a peak of 25% in the U.S. The United States entered into recession in December 2007 and in March 2009, U-3 unemployment reached 8.5%. In March 2009, statistician John Williams "argued that measurement changes implemented over the years make it impossible to compare the current unemployment rate with that seen during the Great Depression".Risks imposed by deregulation35

Nobel Prize winning economist Paul Krugman predicted a series of depressions in his Return to Depression Economics (2000), based on "failures on the demand side of the economy." On January 5, 2009, he wrote that "preventing depressions isn't that easy after all" and that "the economy is still in free fall." In March 2009, Krugman explained that a major difference in 4this situation is that the causes of this financial crisis were from the shadow banking system. "The
35

Avialable at http://en.wikipedia.org/wiki/Depression_(economics) visited on 19/10/2010

42

crisis hasn't involved problems with deregulated institutions that took new risks... Instead, it involved risks taken by institutions that were never regulated in the first place." On February 22, NYU economics professor Nouriel Roubini said that the crisis was the worst since the Great Depression, and that without cooperation between political parties and foreign countries, and if poor fiscal policy decisions (such as support of zombie banks) are pursued, the situation "could become as bad as the Great Depression." On April 27, 2009, Roubini expressed a more upbeat assessment by noting that "the bottom of the economy [will be seen] toward the beginning or middle of next year." On November 15, 2008, author and SMU economics professor Ravi Batra said he is "afraid the global financial debacle will turn into a steep recession and be the worst since the Great Depression, even worse than the painful slump of 19801982 that afflicted the whole world". In 1978, Batra's book The Downfall of Capitalism and Communism was published. His first major prediction came true with the collapse of Soviet Communism in 1990. His second major prediction for a financial crisis to engulf the capitalist system seems to be unfolding since 2007 with increasing attention being paid to his work. On April 6, 2009 Vernon L. Smith and Steven Gjerstad offered the hypothesis "that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge." In his final press conference as president, George W. Bush claimed that in September 2008 his chief economic advisors had said that the economic situation could at some point become worse than the Great Depression A tent city in Sacramento, California was described as "images, hauntingly reminiscent of the iconic photos of the 1930s and the Great Depression" and "evocative Depression-era images." On April 17, 2009, head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right

43

policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronized by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries

CH13. EFFECT ON ASIA

The banking sector suffered from the subprime crisis The US subprime crisis has only just begun. The effects of subprime and the credit crunch will hit anyone with loans, mortgages, or even managed investments.The US subprime crisis has been building up over several years. Banks and mortgage lenders have been issuing too many highrisk home loans (called subprime loans), which is now causing havoc in the global financial system. What Caused The Subprime Crisis? Due to rising interest rates, falling property values and other macro-economic factors, some Americans are finding it impossible to keep up with their subprime mortgage repayments. This has caused wide-scale mortgage defaults, leading to home repossessions. The problem is, these homes aren't worth as much as they once were. So the equity locked in the house is not enough to repay the original loan. Disturbingly, these people were originally flagged as having poor credit histories, but that didnt stop mortgage lenders from handing out massive loans to fuel the property boom. To make things worse, these subprime mortgages were passed on by the banks in the guise of complex financial products, which were then re-sold to investment funds. The result is that the banks and the general public is now exposed to this excess of "bad debt" i.e. money that will never be paid back through pension and investment funds. The situation is labeled the subprime crisis for originating from subprime loans. The Effects of The US Subprime Crisis
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Supbrime loans can be circulated in the financial system for a long time without being noticed. However, with banking institutions due to publish their annual accounts in coming months, the initial impact of the US subprime crisis will finally be clear. It is unlikely that another Northern Rock episode will emerge, since it had an unusual business model that left it highly exposed to the credit markets. However, mass panic and media hype could scare bank customers into withdrawing their life savings. A run on a bank can destroy it. Unless the government can step in to guarantee the customers savings but that is not a viable solution on a large scale. The Effects of The Credit Crunch Another problem that consumers face is the difficulty of obtaining loans and mortgages. Banks are acutely aware of the potential subprime debt within the business and cant afford any extra exposure. Personal loan power will come down to having a spotless credit history. Jonathan Correll, of the mortgage broker Hamptons International, was quoted in an interview with The Times: Borrowers today have to make sure they are whiter than white. If you have so much as a wrinkle on your record the lenders will say no. It is therefore very important that consumers keep on top of credit cards, store cards, utility bills, mobile phone bills, loan and mortgage repayments. The loan provider will search individual records going back three years. People with poor credit histories must now dig themselves out of an even deeper hole. It may still be possible for them to attain a loan, but the limit will be capped - and they will pay through the nose in interest.36

36

Available at http://www.suite101.com/content/fallout-of-the-sub-prime-crisis-a34149 visited on 11/11/ 2010

45

CH14. GENERAL EFFECTS WORLDWIDE

Threats to food security Food prices have increased dramatically around much of the world as a result of the recent financial crisis, and an estimated 150 million people were added to the ranks of the chronically hungry in 2008 alone. There have been food riots in many of the hardest-hit countries, and the situation is only expected to get worse. This series of articles will explore the current statistics on world hunger, as well as how chronic hunger affects global productivity, how much worse the global food shortages might get and what people can do to help promote global food security.

The Global Recession is threatening food security, especially in developing countries as shrinking incomes and lack of access to food are increasing hunger and poverty. The Global Financial Crisis, which started as a subprime crisis, spread recession rapidly around the world. The Global Recession, shrinking the global economy is having a major impact on trade and the price of living. According to the International Monetary Fund (IMF), the subprime crisis originally bypassed banks in low-income countries, but they are now finding themselves cut off from access to global finance. The IMF pinpointed 26 countries that are the most vulnerable in the economic crisis, with African countries the hardest hit. The IMFs managing director Dominique Strauss-Kahn said that the worsening economic conditions would increase the humanitarian crisis in developing countries. The World Bank estimates that this would result in an extra 2.8 million children across the world dying. What is Food Security?

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The Global Recession has had a direct impact on the rising costs of food and fuel prices. With these rising prices came an increase in the incidence and severity of hunger in developing countries. Rising food prices, coupled with a general food shortage in developing countries is having a disastrous affect on food security for people in developing nations. People in poorer communities are becoming more exposed to fluctuations in prices. In addition, the shrinking incomes of poor families as a result of the Global Recession means that people in poor communities are loosing access to food. As their purchasing power shrinks, they are eating less and health systems are failing. Speaking at The Centre for Strategic and International Studies Task Force on Food Security, Josette Sheeran from the World Food Programme calls it the silent tsunami because of the way it dramatically decreased food access for many people in poorer nations due to the sudden increase in food prices. What is Being Done about Food Security? Governments are now recognising that the economic crisis is becoming a human security crisis and are addressing it in their humanitarian policies. World leaders are working through international organisations such as the United Nations to fight the threat of food security in developing countries. The G-20 in their London meeting in April, 2009 set to address the issue of lowering the blow of the global recession on low-income countries by doubling the amount of concessional lending available to the worlds poorest countries. This sparked controversy about how much this lending would really help poorer countries address issues like food security. Civil society is also important in fighting the threat of food security and food shortages. Many not-for-profit groups are lobbying governments and creating programs to tackle the issue. PLAN Australia, for example, have started a Food Security Appeal to raise funds to provide emergency food relief and food and nutrition programs.

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The globalisation of everything from technology to trade to economies and food means that as long as the global financial crisis worsens, food security for everyone, but more so in the developing world, will be threatened.

CH15. ECONOMIC SLOW DOWN IN AFRICA

Global Recession Has Reached Africa with Alarming Forecasts Africa will soon be hardly hit by the most severe effects of the global financial crisis with the risk of pulling millions of people back into poverty. At the opening of a two days conference in Dar-es-Salaam, Tanzania, the International Monetary Fund (IMF) warned today about a slow down of the African economic growth to 3.25% in 2009, half the growth rate it previously thought. The slump in commodity prices and the credit squeeze are the main causes, the IMF said. The conference, hosted by the Republic of Tanzania and the IMF, was called with the objective of discussing the external support that the IMF and other Western donors may be able to provide to help mitigate the impact of the crisis on Africa. Alarming Forecasts for Africa's Economy The financial crisis has slowly reached the continent but its impacts will soon be severe. This is what the IMF calls "third wave" of the crisis, which is hitting low- income countries and is expected to depress economic growth, put budgets under strain, and weaken external accounts. The risk for millions of Africans is to be pulled back into poverty. "We must ensure that the voices of the poor are heard. We must ensure that Africa is not left out. This is not only about protecting economic growth and household incomesit is also about containing the threat of civil unrest, perhaps even of war. It is about people and their futures" said IMF managing director Dominique Strauss-Kahn. In the past years many African economies have grown at strong rates boosted by rising commodity prices, including oil.
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"Africa is already facing the impact of climate change and food insecurity and will be heavily impacted by the economic meltdown. Immediate steps must be taken to allow African countries access to a large increase in financial flows. Africa must be part of the solution to the global economic crisis" said Kofi Annan at the conference. Africa's New Faces of Hunger Today sub-Saharan Africa is home of 212 million undernourished (State of Food Insecurity in the World 2008, Food and Agriculture Organization of the United Nations (FAO)). The urban poor in the Horn of Africa are the new faces of hunger in a region where 14.6 million of people now require humanitarian assistance due to poor rains, high food and fuel prices, conflicts, animal diseases, inflation and poverty (SOFI 2008, FAO). The low growth predictions mean that the conditions of millions of Africans living in poverty are likely to become even worse than now. The IMF confirmed that many countries will not have the funds to protect the poor from the effects of the downturn and may need external assistance. "While African policymakers are rising to this unexpected challenge, donors must also play their part. They must maintain their commitments and scale up, not scale back their support," it said. The IMF will ask for substantial increase in its funding at the next G20 meeting in April. Whether it will succeed in that, is going to be a chapter of further analysis. Job losses and unemployment rates Many jobs have been lost worldwide. In the US, job loss has been going on since December 2007, and it accelerated drastically starting in September 2008 following the bankruptcy of Lehman Brothers. By February 2010, the American economy is reported to be more shaky than the economy of Canada. Many service industries have reported dropping their prices in order to maximize profit margins in an era where employment is fleeting and either underemployment or unemployment is a sure factor in life.37
37

Available at http://en.wikipedia.org/wiki/Late-2000s_recession#Countries_in_economic_recession_or_depression

visited on 10/11/ 2010

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CH. 16. HOW FAST THE WORLD CAME OUT OF BOTH THE ECONOMIC DOWNTURNS?
Positives aspects Recession 2008 recessions are a necessary evil in capitalist societies. Well, there are some arguments, that back up this theory. Although the word recession strikes fear into the hearts of people, recessions heal the economy from unrealistic developments and creates opportunities for investors. In the long run it is just a periodic downturn in the economic cycle and for some good reasons it seams. Effects on the economy Recessions correct economic imbalances and helps the economy to get back to a healthy, realistic, and sustainable rate of growth. The job of a recession is to clean the fat out of the system, mop up excess, and pave the way for the next expansion. However, there are always bankrupts, but in a recession the weak companies get put out of business and the strong ones are forced to optimize their business models and come out with better products. This brings job losses which are freed up to be efficiently used somewhere else in a flexible market. Recessions also eliminate these sorts of unsustainable bubbles like the technology bubble in the late 90s or the actual housing crisis. Of course, it hurts to lose a good paid job and suffer from financial loss, but it is necessary for our economy to become healthy once again. The Stock market drops Stocks markets go down in recessions, but as stated in one of my previous articles, Search for opportunities in crises, there are great opportunities in stock market declines. During periods of mass panic on the market all stocks go down for a while, because people like to panic somehow, people didnt know whyy. The important thing is, both good and bad companies go down. This means, that you can get high quality companies at a low price and with good long-term

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perspectives. Thats the time to position yourself to profit from these companies and catch the opportunity while it is there. In fact, most even know a few investment guys, who are really cheered up and looked forward to the upcoming recession because of new investment chances. Personal finance According to a report by CNN, it is found on moneysocket.com, the average American owes $10,000 in credit card debt annually. If people will ever recognise this misbehaviour, it maybe will happen during a recession. Although, most dont believe people are easy to change, many thinks think if suffering from financial loss, unemployment and hard times, maybe they start to think about there personal finances and learn something from it.38 As we know from the past, a recession lasts for about 10 months, so good times will be back. Nevertheless, they are necessary and you will experience a few recessions in your life, so better be prepared. The important thing is not to panic and learn from crises. In fact, recessions can make you better and more skilled after all, just like they do with our economy on a regular basis.

38

Available at http://www.worldfinancialblog.com/economy/the-positive-aspects-of-a-recession/

visited on 11th /11/ 2010 at 1 pm.

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CH.17. WHAT HAVE WE LEARNT FROM BOTH?

Most of the economists are concerned that the current global crisis might turn into something grave like the great depression of 1929 or even worse. In order to avoid that, the central banks round the world are taking steps to create more liquidity in their respective economies without realizing that this may aggravate the problem. Before making a new economic policy, it is important to see the past implications of that policy. It was an artificial economic boom that was responsible for the great depression of 1929. For the entire decade before that, most of the companies throughout the world saw unprecedented rise in their profits. The economic growth came to a halt after the giant companies started facing losses due to lack of demand. It was the biggest recession in the history which lasted for a decade ruining worlds biggest economies of US and Europe. It all started when the US economy was becoming increasingly unstable due to widening disparity of income between the rich and the poor class which resulted in an oversupply of goods as people did not have income to buy those goods. Easy availability of credit and more investment were thought of to be the immediate solutions by the fed (the central bank of United States). Cash reserve ratio, statutory liquidity ratio and repo rates were all brought down in order to induce liquidity in the economy. This way artificial demand was created. However, most of the people were unable to repay the debts. The demand for the goods declined as most of the income of the people went to repay debts. Consequently, the investors confidence declined which reduced the production of luxury goods as well. The effect poured on to other nations as well. The world economy was trapped in an unusual vicious circle. Something like this happened again in the 1990s when most of the banks got into home loans and mortgages. As the real estate prices were rising, this became an easy way for lenders to create money. The optimism led the banks to take up risky loans as well. The banks and investment companies got into the business of trading risk. Yet again, the same crisis of confidence approached when people found it increasingly difficult to repay the long-term debts. Some of the worlds largest banks like Lehman Brothers found themselves bankrupt. It did not take long to percolate the effect onto other companies as well. The giant companies like Sony, Motorola, DLF, AIG, Indian Inc, TCS, General Motors, etc have suffered heavy losses; millions
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have lost their jobs and the solutions to bring the declining growth rates back on the track are no where in the sight. No one can deny that it is the lack of efficient financial regulations that is responsible for the present crisis. But criticizing past is not suffice to solve present problems. There is an urgent need of deploying efficient monetary and fiscal policies. Though, to increase the net investment, it is important that interest rates are kept at low levels but a major fiscal stimulus is needed for the world economy to flourish again. The Keynesian theory of government intervention was adopted to take the world economy out of the great depression. Government expenditure was increased substantially in order to induce spending in the economy. Multipliers worked well and the income and outputs rose by 1933. One major factor which helped the US key industries flourish again was rise in demand due to the onset of World War II. No one surely wants world war III to end recession! However, fiscal stimulus is the need of the hour. That is, the level of government expenditure should be raised and the taxes reduced. Further, the taxes should not be raised substantially in near future so that the optimism prevails and aggregate demand does not fall back again. The international banks (like World Bank, IMF) can also deploy efficient policies to induce liquidity in the global economy.39 The importance of two most significant sectors- infrastructure and agriculture- is often understated. It is the growth in these two sectors which brings about rise in demand for all other industries (by increasing wages for a large number of people) and thus, higher overall economic growth. But not much attention is paid to these key sectors while policy formation. The rise in food production in US also played a major role in taking the economy out of recession. The governments should not ignore the agricultural sector completely. It is the high time that the governments invest in infrastructure wherever necessary. In order to avoid the situation becoming more precarious like the Great Depression, more aggressive policies are needed immediately.40

39 40

Peter Tuddle politics and ecnomics beth university, 2009,p .123 Ibid 39, Pg.122

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CH.18. WHAT HAVE WE LEARNT FROM RECESSION?

World leaders must defuse currency tensions before they worsen to avoid repeating the mistakes of the Great Depression. The spirit of global economic cooperation, first forged in 2008 during the darkest days of the financial crisis, has weakened as the recession gives way to an uneven and shaky recovery, the head of the International Monetary Fund warned. Fears of a global currency war as nations look to export their way to economic health have jumped to the top of the agenda at IMF and World Bank meetings this weekend. The push among nations for a trading edge, reminiscent of the strains that exacerbated the Great Depression, are also expected to be a primary topic of discussion when Group of Seven finance leaders hold a closed-door dinner on Friday. The meetings provide a forum for intense discussions about efforts to persuade China to let its currency rise, the weakening in the U.S. dollar, and the strengthening of emerging market currencies as investors chase higher yields. If one lets this slide into conflict, or forms of protectionism, then we run the risks of repeating the mistakes of the 1930s. Finance ministers from the Group of 20 rich and emerging hold a working breakfast on Friday, but that meeting will focus on the separate, touchy issue of giving emerging markets more power at the IMF. The IMF trimmed its 2011 growth forecast for advanced economies and warned the task of reducing heavy government debt burdens, while essential, would act as a significant drag on growth. Slow growth at home leaves countries unusually reliant on exports, heightening concerns they will intentionally weaken their currencies to boost trade.

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Zoellick said history shows "beggar thy neighbor" policies don't work, and suggested international agencies such as the IMF and World Trade Organization could help manage currency tensions before they erupt into something more damaging. Japan intervened to weaken the yen last month for the first time in six years, and several emerging markets have taken steps to prevent their currencies from rising too rapidly.

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CH.19. CHINA AT THE CENTER

The IMF's managing director, Dominique Strauss-Kahn, said fading global cooperation was regrettable. "I think it's fair to say that momentum is not vanishing but decreasing and that's a real threat," he warned at a separate news conference. "Everybody has to keep in mind this mantra that there is no domestic solution to a global crisis." Strauss-Kahn said he disliked the notion that a currency war was brewing because the term was "too military," but conceded "it's fair to say that many do consider their currency as a weapon and that's certainly not for the good of the global economy." In an interview published by French newspaper Le Monde earlier on Thursday, Strauss-Kahn pointed at China's policy on its yuan currency as a primary sticking point in efforts to rebalance the global economy. "The undervaluation of the yuan is the source of tensions in the world economy which are in the process of becoming a threat," he told the newspaper. "If we want to avoid creating the conditions for a new crisis, China will need to accelerate the appreciation process." China held the yuan stable during the financial crisis but in June promised to let it respond more freely to market forces. Since then it has risen only about 2 percent against the U.S. dollar. Strauss-Kahn said having a bigger say at the IMF, as requested by big emerging economies like China, comes with greater responsibility in the global economy. "If you want to be at the center of the system ... it goes with having more responsibility in the system," he said.

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CH.20. DOWNWARD SPIRAL

Financial leaders from emerging market countries expressed some frustration with the rich world's policies, too. The G24, composed of emerging and developing economies, said a simultaneous budget clampdown "presently under way in many advanced economies poses considerable risks of a downward spiral in global demand." The G24 also said low interest rates in advanced economies were sending investment money flooding into faster-growing emerging markets, driving up asset prices and inflation. The European Central Bank and the Bank of England both kept interest rates at record lows in meetings on Thursday, while the Bank of Japan cut its benchmark rate to zero this week. The U.S. Federal Reserve is considering printing more money to buy assets in the hope of speeding up the pace of U.S. growth to bring down high unemployment. The side effect is a weaker dollar that is fueling global tensions. Since mid-June, the U.S. dollar has fallen nearly 13 percent against a basket of major currencies, erasing most of the gains it racked up earlier in the year when European sovereign debt worries sent investors scrambling for safety. ECB President Jean-Claude Trichet said volatile exchange rate moves had "adverse implications" for economic and financial stability and that he shared the view of U.S. authorities that a strong dollar was in Washington's best interest. U.S. officials, however, have been silent on the greenback's fall.

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CONCLUSION
One direct outcome of the Great Depression was the rise of dictatorship in Europe with guidance from Nazi Germany. In the words of British historian Peter Calvocoressi, the First World War created a situation where nation protected itself against nation --- class turned against class --and nowhere was the confusion and disruption more evident than in Germany. He lamented, Among those who gained was Hitler. The Nazi dictators rise to power condemned Europe to many more years of carnage and butchery. The Second World War which ran from 1939 to 1945 once again confirmed what Taylor had feared about the First World War, that western people despite their extraordinary accomplishments were never more than a step or two away from barbarism. Todays equivalence of fascist barbarism is terrorism. Though built on religious fundamentalism, its economic roots are very deep and strong. It feeds on economic frustration and draws its supporters from the poorest parts of the world. Its enemies are the West in general and America in particular. When Bin Laden hit the World Trade Center in 2001, he was striking a deadly blow at the heart of American (and western) capitalism. Although some casual comparisons between the late 2000s recession and the great depression have been made., there remains large differences, between the two events. The consensus among economists in March 2009 was that a depression was not likely to occur. UCLA Anderson Forecast director Edward Learner said on March 25th 2009 that there has not been any major predictions at that time which resembled a second Great depression: We have frightened consumers to the point where they imagine there is a good prospect of the depression. That certainly is not the prospect. No reputable forecaster is producing anything like a great depression. Differences explicitly pointed out between the recession and the great depression include the facts that over the 79 years between 1929 and 2008, Great changes occurred in the economic philosophy and policy, the stock market had not fallen as far as it did in 1932 or in 1982, the ten years price-to-earnings ratio to stocks was not as low as in the 30s or the 80s, inflation adjusted .S. housing prices in March 2009 were higher than any time since 1980, (including the housing boons of the 1970s and the 80s) the recession of the early 30s lasted over three and a half years and during the 1930s the the supply of money (currency plus demand deposits) fell by 25% (where as in 2008 and 2009 the fed has taken an ultra loose credit stance). Furthermore
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the unemployment rate in 2008 and early 2009 and the rate at which it rose was comparable to most of the recessions occurring of the World War II and was dwarfed by the 25% unemployment rate peak of the great depression. Price to earnings ratios have to drop as low as in previous recessions . On this issue , it is critically important though, to recognize that different analysts have different earnings expectations, and the consensus view is more often wrong than right. Some argue that price-toearnings ratio remain because of unprecedented fall in earnings. Three years into the great depression, unemployment reached a peak of 25% in the U.S. the United States entered into recession in December 2007 and March 2009; U3 unemployment reached 8.5% in March 2009 statistician John Williams argued that measurement changes implemented over the years and make it impossible to compare the current unemployment rate with that seen in the great depression. Nobel Prize winning Economist Paul Krugman predicted a series of depressions in his Return to Depression Economics (2000) based on failures on the demand side of the economy. On January 5,2007 he wrote that preventing depressions isnt that easy after all, and that economy is in free fall. In March 2007 he explained a major difference in this situation is that the causes of the financial crisis were from the shadow banking system. The crisis hasnt involved problems with deregulated institutions that took new risks. Instead it involved risks taken by institutions that were never regulated in the first place. The crisis was the worst since the Great Depression and it was speculated that without cooperation among political parties and foreign countries and if poor fiscal policy decisions (such as support from the zombie banks) are pursued, the situation could become as bad as the Great Depression. Market Strategist Phil Dow said he believes that distinctions exist between the current market malaise and the Great Depression. In his final press conference as president, George W. Bush claimed that in September 2008 his chief economic advisors had said that the economic situation could at same point become worse than the great depression. According to offered the hypothesis Vernon L.Smith offered the hypothesis that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income income distribution, can be transmitted quickly and forcefully into the financial system. It appears that were witnessing the second great consumer debt crash, the end of a massive consumption binge. The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today. The IMF pointed out that
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unlike the great depression; this recession was synchronized by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.

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Bibliography
1. McElvaine, Robert. The Great Depression:America, 1929-1941. 1st ed. New York: Times Book, 1993. 402. Print. 2. Bernanke, Ben. Essays on the great depression. 2nd ed. new jersey: Princeton University Press2000. 310. Print. 3. Burgan , Michael. The Great Depression. 1st ed. minneapolis: compass point books, 2009. 59. Print. 4. Schultz, Stanley. The Great Depression: A Primary Source History. 1st ed. Chicago: A1 Books, 2005. 98. Print. 5. Fontaine, Peter. Budget and Economic Outlook: Fiscal Years 2008 To 2018. 3rd ed. New York: Diane Publishing, 2008. 109. Print.

Webliography
1. www.wikipedia.org 2. www.jstor.com 3. www.ssrn.com 4. www.scribd.com 5. www.usa.gov.com

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