The Great Depression of 1929

and the Recent Global

Meltdown
A comparative study on different aspect on the
consequences of the recession then and now

1
 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 about 1929 and lasted until the late 1930s or 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 world's economy can decline. It
originated in United State starting with stock market crash of October 29, 1929 (known as
Black Tuesday), but quickly spread to almost every country in the world. The Great
Depression had devastating effects in virtually every country, rich and poor. Personal
Income tax revenue, profits and prices dropped, and international trade plunged by a half
to two-thirds.

Depression is the result of recession which is running through a decade. Recession

means when the gross domestic product (GDP) of a country declines for two or more
consecutive quarters of a year, the condition is known as recession.

Beginning in the United Stated in December (and with much greater intensity since
September 2008, according to the National Bureau of Economic Research) the
industrialized world has been undergoing a recession, a pronounced deceleration of
economic activity. This Global Recession has been taking in economics environment
characterised various imbalances and was sparked by the outbreak of the financial crisis
of 2007—2009. Although the late 2000s has at times been referred to as “the Global
Meltdown”, this same phrase has been used to refer to every recession of several
preceding decades.

The Great Depression has devastating effects in virtually every country, rich &
poor. Unemployment in the United States rose to 25% and in some countries rose as high
as 33%. Cities all around the world were hit hard, especially those dependent on heavy
industry. Construction was virtually halted in many countries. In the recent Global
meltdown, the International Labour Organisation( 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

2
increase by more than 50 million in 2009 as the global recession intensifies, the ILO has
forecast.

In December 2007, the U.S. 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%. Spain's 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 of jobs 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.
More recently, economists have announced the end of the recession last month, and have
predicted that job losses will stop in early 2010.

The rise of advanced economies in Brazil, India, and China increased the total
global labor pool dramatically. Recent improvements in communication and education in
these countries has allowed workers in these countries to compete more closely with
workers in traditionally strong economies, such as the United States. This huge surge in
labor supply has provided downward pressure on wages and contributed to
unemployment.

3
 The Great Depression of 1929 and the Recent Global
Meltdown
A comparative study on different aspect on the consequences of the
recession then and now

Although some casual comparisons between the late-2000s recession and the
Great Depression have been made, there remain large differences between the two events.
But the causes of both are not same.
Start of the Great Depression
Historians most often attribute the start of the Great Depression to the
sudden and total collapse of US stock market prices on October 29, 1929,
known as Tuesday. However, some dispute this conclusion, and see the stock
crash as a symptom, rather than a cause of the Great Depression. Even after
the Wall Street Crash of 1929, optimism persisted for some time; John D.
Rockefeller said that "These are days when many are discouraged. In the 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 still almost 30% below the
peak of September 1929. Together, government and business actually spent
more in the first half of 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 ten percent, 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 1928. Prices in general began to decline, but wages 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

4
pulled down most other countries at first, and then internal weaknesses or strengths in
each country made conditions worse or better. Frantic attempts to shore up the economies
of individual nations through protectionist policies, such as the 1930 U.S. Smoot–Hawley
Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global
trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

Causes

There were multiple causes for the first downturn in 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 Britain's decision to return to the Gold
Standard at pre-World War I parities (US$4.86:£1).

Recessions and business cycles are thought to be a 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 eight 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 of government efforts to
regulate interest rates, curtail widespread bank failures, and control the money supply.
Those who believe in a large role for the state in the economy believe it was mostly a
failure of the free markets and those who believe in free markets believe it was mostly a
failure of government that compounded the problem.

Current theories may be broadly classified into three main points of view. First,
there are structural theories, most importantly Keynesian economics, 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
5
in consumption and investment spending. Once panic and deflation set in, 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 the 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 explanation 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 income and to employment that was well
below the 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 people
fully employed, governments have to run deficits when the economy is slowing, as the
private sector would not invest enough to keep production at the normal level and bring
the economy out of recession. Keynesian economists called on governments during times
of economic crisis to pick up the slack by increasing 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, this improved the economy, but Roosevelt never
spent enough to bring the economy out of recession until the start of World War II.

New classical approach Recent work from a neoclassical perspective focuses

on the decline in productivity that caused the initial decline in output and a prolonged
recovery due to policies that affected the labour market. This work, collected by Kehoe
and Prescott, decomposes the economic decline into a decline in the labour force, capital
stock, and the productivity with which these inputs are used. This study suggests that
theories of the Great Depression have to explain an initial severe decline but rapid
recovery in productivity, relatively little change in the capital stock, and a prolonged
6
depression in the labour force. This analysis rejects theories that focus on the role of
savings and posit a decline in the capital stock.

Inequality of wealth and income Two economists of the 1920s, Waddill

Catchings and William Trufant Foster, popularized a theory that influenced many policy
makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Marriner
Eccles. It held the economy produced more than it consumed, because the consumers did
not have enough income. Thus the unequal distribution of wealth throughout the 1920s
caused the Great Depression.

According to this view, the root cause of the Great Depression was a global
overinvestment 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 reinflate prices and wages to force as much of the inflationary
increase in purchasing power into consumer spending. The economy was overbuilt, and
new factories were not needed. Foster and Catchings recommended federal and state
governments start large construction projects, a program followed 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 recovery began in the spring of 1933. However, the
U.S. did not return to 1929 GNP for over a decade and still had an unemployment rate of
about 15% in 1940, albeit down from the high of 25% in 1933.

There is no consensus among economists regarding the motive force for the U.S.
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 United States economy, and that the economy
showed little sign of self-correction. The gold inflows were partly due to devaluation of
the U.S. 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

7
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. Economists Harold L. Cole and Lee E. Ohanian, believe that the economy
should have returned to normal after four years of depression except for continued
depressing influences, and point the finger to the lack of downward flexibility in prices
and wages, encouraged by Roosevelt Administration policies such as the National
Industrial Recovery Act. Some economists have called attention to the expectations of
reflation and rising nominal interest rates that Roosevelt's words and actions portended.

Year

8
Chart:-I The overall courses of the Depression in the United Stated, as reflected in per capita GDP shown in the
constant year 2000 year dollars, plus some of the key events of the period.

Gold standard Economic studies have indicated that just as the downturn was
spread worldwide by the rigidities of the Gold Standard, it was suspending gold
convertibility (or devaluing the currency in gold terms) that did most to make recovery
possible. What policies countries followed after casting off the gold standard, and what
results followed varied widely.

Every major currency left the gold standard during the Great Depression. Great
Britain was the first to do so. Facing speculative attacks on the pound and depleting gold
reserves, in September 1931 the Bank of England ceased exchanging pound notes for
gold and the pound was floated on foreign exchange markets. Great Britain, Japan, and
the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy
and the United States, remained on the gold standard into 1932 or 1933, while a few
countries in the so-called "gold bloc", led by France and including Poland, Belgium and
Switzerland, stayed on the standard until 1935–1936. According to later analysis, the
earliness with which a country left the gold standard reliably predicted its economic
recovery. For example, Great Britain and Scandinavia, which left the gold standard in
1931, recovered much earlier than France and Belgium, which remained on gold much
longer. Countries such as China, which had a silver standard, almost avoided the
depression entirely. The connection between leaving the gold standard as a strong
predictor of that country's severity of its depression and the length of time of its recovery
has been shown to be consistent for dozens of countries, including developing countries.
This partly explains why the experience and length of the depression differed between
national economies

World War II and recovery The common view among economic historians is
that the Great Depression ended with the advent of World War II. Many economists
believe that government spending on the war caused or at least accelerated recovery from
the Great Depression. However, some consider that it did not play a great role in the
recovery, although it did help in reducing unemployment. The massive rearmament
policies leading up to World War II helped stimulate the economies of Europe in 1937–

9
39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of
manpower following the outbreak of war in 1939 finally ended unemployment. America's
late entry into the war in 1941 finally eliminated the last effects from the Great
Depression and brought the unemployment rate down below 10%. In the United States,
massive war spending doubled economic growth rates, either masking the effects of the
Depression or essentially ending the Depression. Businessmen ignored the mounting
national debt and heavy new taxes, redoubling their efforts for greater output to take
advantage of generous government contracts.

Start of the Recent Global Meltdown

While 2008 was the year of crisis, the origins of this crisis go back to the middle
of 2007 when evidence that homeowners who had borrowed to finance the property they
purchased had begun defaulting on their debt. Soon it became clear that too many people
with limited or poor creditworthiness had been induced to borrow large sums by banks
eager to exploit the large amounts of liquidity and the low level of interest rates in the
system.

An unsustainable proportion of defaults seemed inevitable. What was

disconcerting in the events that followed was that this “sub-prime” problem soon spread
and created a systemic crisis that soon bankrupted a host of mortgage finance companies,
banks, investment banks and insurance companies, including big players like Bear Sterns,
Lehman Brothers and AIG.

The reasons this occurred are now well known. The increase in sub-prime credit
occurred because of the complex nature of current-day finance that allows an array of
agents to earn lucrative returns even while transferring the risk. Mortgage brokers seek
out and find willing borrowers for a fee, taking on excess risk in search of volumes.

Mortgage lenders finance these mortgages not with the intention of garnering the
interest and amortisation flows associated with such lending, but because they can sell
these mortgages to Wall Street banks.

The Wall Street banks buy these mortgages because they can bundle assets with
varying returns to create securities with differing probability of default that are then sold

10
to a range of investors such as banks, mutual funds, pension funds and insurance
companies.

Needless to say, institutions at every level are not fully rid of risks but those risks
are shared and rest in large measure with the final investors in the chain. And
unfortunately all players were exposed to each other and to these toxic assets. When sub-
prime defaults began this whole structure collapsed leading to a financial crisis of giant
proportions.

The crisis had a number of consequences in the developed countries. It made

households whose homes were now worth much less more cautious in their spending and
borrowing behaviour, resulting in a collapse of consumption spending.

It made banks and financial institutions hit by default more cautious in their
lending, resulting in a credit crunch that bankrupted businesses. It resulted in a collapse in
the value of the assets held by banks and financial institutions, pushing them into
insolvency.

All this resulted in a huge pull out of capital from the emerging markets: Net
private flows of capital to developing countries are projected to decline to $530 billion in
2009, from $1 trillion in 2007.

The effects this had on credit and demand combined with a sharp fall in exports,
to transmit the recession to developing countries. All of these effects soon translated into
a collapse of demand and a crisis in the real economy with falling output and rising
unemployment. This is only worsening the financial crisis even further.

Causes

Subprime lending as a cause

Based on the assumption that subprime lending precipitated the crisis, some have
argued that the Clinton Administration may be partially to blame, while others have
pointed to the passage of the Gramm-Leach-Bliley Act by the 106th Congress, and
over-leveraging by banks and investors eager to achieve high returns on capital.

11
 Some believe the roots of the crisis can be traced directly to subprime lending by
Fannie Mae and Freddie Mac, which is government, sponsored entities. The New York
Times published an article that reported the Clinton Administration pushed for subprime
lending: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been
under increasing pressure from the Clinton Administration to expand mortgage loans
among low and moderate income people" (NYT, 30 September 1999).

In 1995, the administration also tinkered with Carter's Community Reinvestment

Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt by
many that this was done to help boost a stagnated home ownership figure that had
hovered around 65% for many years. The result was a push by the administration for
greater investment, by financial institutions, into riskier loans. In a 2000 United States
Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 it
was shown that $467 billion of mortgage credit poured out of CRA-covered lenders into
low- and mid-level income borrowers and neighborhoods. (See "The Community
Reinvestment Act After Financial Modernization," April 2000.)

Government activities as a cause

In 1992, the 102nd Congress under the George H. W. Bush administration

weakened regulation of Fannie Mae and Freddie Mac with the goal of making available
more money for the issuance of home loans. The Washington Post wrote: "Congress also
wanted to free up money for Fannie Mae and Freddie Mac to buy mortgage loans and
specified that the pair would be required to keep a much smaller share of their funds on
hand than other financial institutions. Whereas banks that held $100 could spend $90
buying mortgage loans, Fannie Mae and Freddie Mac could spend $97.50 buying loans.
Finally, Congress ordered that the companies be required to keep more capital as a
cushion against losses if they invested in riskier securities. But the rule was never set
during the Clinton administration, which came to office that winter, and was only put in
place nine years later."

Others have pointed to deregulation efforts as contributing to the collapse. In

1999, the 106th Congress passed the Gramm-Leach-Bliley Act, which repealed part of the
Glass-Steagall Act of 1933. This repeal has been criticized by some for having
contributed to the proliferation of the complex and opaque financial instruments which

12
are at the heart of the crisis. However, some economists object to singling out the repeal
of Glass-Steagall for criticism. Brad DeLong, a former advisor to President Clinton and
economist at the University of California, Berkeley and Tyler Cowen of George Mason
University have both argued that the Gramm-Leach-Bliley Act softened the impact of the
crisis by allowing for mergers and acquisitions of collapsing banks as the crisis unfolded
in late 2008.

Over-leveraging, credit default swaps and collateralized debt obligations as

causes

Another probable cause of the crisis—and a factor that unquestionably amplified

its magnitude—was widespread miscalculation by banks and investors of the level of risk
inherent in the unregulated Collateralized debt obligation and Credit Default Swap
markets. Under this theory, banks and investors systematized the risk by taking advantage
of low interest rates to borrow tremendous sums of money that they could only pay back
if the housing market continued to increase in value.

According to an article published in Wired, the risk was further systematized by

the use of David X. Li's Gaussian copula model function to rapidly price Collateralized
debt obligations based on the price of related Credit Default Swaps. Because it was highly
tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors,
issuers, and rating agencies. According to one wired.com article: "Then the model fell
apart. Cracks started appearing early on, when financial markets began behaving in ways
that users of Li's formula hadn't expected. The cracks became full-fledged canyons in
2008—when ruptures in the financial system's foundation swallowed up trillions of
dollars and put the survival of the global banking system in serious peril...Li's Gaussian
copula formula will go down in history as instrumental in causing the unfathomable
losses that brought the world financial system to its knees."

The pricing model for CDOs clearly did not reflect the level of risk they
introduced into the system. It has been estimated that the "from late 2005 to the middle of
2007, around $450bn of CDO of ABS were issued, of which about one third were created
from risky mortgage-backed bonds out of that pile, around $305bn of the CDOs are now
in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for
the biggest pile of defaulted assets, followed by UBS and Citi." The average recovery rate

13
for high quality CDOs has been approximately 32 cents on the dollar, while the recovery
rate for mezzanine CDO's has been approximately five cents for every dollar. These
massive, practically unthinkable, losses have dramatically impacted the balance sheets of
banks across the globe, leaving them with very little capital to continue operations.

Credit creation as a cause

The Austrian School of Economics proposes that the crisis is an excellent example
of the Austrian Business Cycle Theory, in which credit created through the policies of
central banking gives rise to an artificial boom, which is inevitably followed by a bust.
This perspective argues that the monetary policy of central banks creates excessive
quantities of cheap credit by setting interest rates below where they would be set by a free
market. This easy availability of credit inspires a bundle of malinvestments, particularly
on long term projects such as housing and capital assets, and also spurs a consumption
boom as incentives to save are diminished. Thus an unsustainable boom arises,
characterized by malinvestments and overconsumption.

But the created credit is not backed by any real savings nor is in response to any
change in the real economy, hence, there are physically not enough resources to finance
either the malinvestments or the consumption rate indefinitely. The bust occurs when
investors collectively realize their mistake. This happens usually some time after interest
rates rise again. The liquidation of the malinvestments and the consequent reduction in
consumption throw the economy into a recession, whose severity mirrors the scale of the
boom's excesses.

The Austrian School argues that the conditions previous to the crisis of the late
2000s correspond exactly to the scenario described above. The central bank of the United
States, led by Federal Reserve Chairman Alan Greenspan, kept interest rates very low for
a long period of time to blunt the recession of the early 2000s. The resulting
malinvestment and overconsumption of investors and consumers prompted the
development of a housing bubble that ultimately burst, precipitating the financial crisis.
This crisis, together with sudden and necessary deleveraging and cutbacks by consumers,
businesses and banks, led to the recession. Austrian Economists argue further that while
they probably affected the nature and severity of the crisis, factors such as a lack of

14
regulation, the Community Reinvestment Act, and entities such as Fannie Mae and
Freddie Mac are insufficient by themselves to explain it.

Austrian economists argue that the history of the yield curve from 2000 through
2007 illustrates the role that credit creation by the Federal Reserve may have played in
the on-set of the financial crisis in 2007 and 2008. The yield curve (also known as the
term structure of interest rates) is the shape formed by a graph showing US Treasury Bill
or Bond interest rates on the vertical axis and time to maturity on the horizontal axis.
When short-term interest rates are lower than long-term interest rates the yield curve is
said to be “positively sloped”. When short-term interest rates are higher than long-term
interest rates the yield curve is said to be “inverted”. When long term and short term
interest rates are equal the yield curve is said to be “flat”. The yield curve is believed by
some to be a strong predictor of recession (when inverted) and inflation (when positively
sloped). However, the yield curve is believed to act on the real economy with a lag of 1 to
3 years.

A positively sloped yield curve allows Primary Dealers (such as large investment
banks) in the Federal Reserve System to fund them with cheap short term money while
lending out at higher long-term rates. This strategy is profitable so long as the yield curve
remains positively sloped. However, it creates a liquidity risk if the yield curve were to
become inverted and banks would have to refund themselves at expensive short term rates
while losing money on longer term loans.

The narrowing of the yield curve from 2004 and the inversion of the yield curve
during 2007 resulted (with the expected 1 to 3 year delay) in a bursting of the housing
bubble and a wild gyration of commodities prices as moneys flowed out of assets like
housing or stocks and sought safe haven in commodities. The price of oil rose to over
$140 dollars per barrel in 2008 before plunging as the financial crisis began to take hold
in late 2008.

Other observers have doubted the role that the yield curve plays in controlling the
business cycle. In a May 24, 2006 story CNN Money reported: “…in recent comments,
Fed Chairman Ben Bernanke repeated the view expressed by his predecessor Alan
Greenspan that an inverted yield curve is no longer a good indicator of a recession
ahead.”
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Oil prices

Economist James D. Hamilton has argued that the increase in oil prices in the
period of 2007 through 2008 was a significant cause of the recession. He evaluated
several different approaches to estimating the impact of oil price shocks on the economy,
including some methods that had previously shown a decline in the relationship between
oil price shocks and the overall economy. All of these methods "support a common
conclusion; had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the
US economy would not have been in a recession over the period 2007:Q4 through
2008:Q3." Hamilton's own model, a time-series econometric forecast based on data up to
2003, showed that the decline in GDP could have been successfully predicted to almost
its full extent given knowledge of the price of oil. The results imply that oil prices were
entirely responsible for the recession; however, Hamilton himself acknowledged that this
was probably not the case but maintained that it showed that oil price increases made a
significant contribution to the downturn in economic growth.

Other claimed causes

Many libertarians, including Congressman and former 2008 Presidential candidate

Ron Paul and Peter Schiff in his book Crash Proof, claim to have predicted the crisis prior
to its occurrence. Schiff also made a speech in 2006 in which he predicted the failure of
Fannie and Freddie. They are critical of theories that the free market caused the crisis and
instead argue that the Federal Reserve's expansionary monetary policy and the
Community Reinvestment Act are the primary causes of the crisis. Alan Greenspan,
former Federal Reserve chairman, has said he was partially wrong to oppose regulation of
the markets, and expressed "shocked disbelief" at the failure of self interest, alone, to
manage risk in the markets.

An empirical study by John B. Taylor concluded that the crisis was: (1) caused by
excess monetary expansion; (2) prolonged by an inability to evaluate counter-party risk
due to opaque financial statements; and (3) worsened by the unpredictable nature of
government's response to the crisis.

16
 It has also been debated that the root cause of the crisis is overproduction of goods
caused by globalization (and especially vast investments in countries such as China and
India by western multinational companies over the past 15–20 years, which greatly
increased global industrial output at a reduced cost). Overproduction tends to cause
deflation and signs of deflation were evident in October and November 2008, as
commodity prices tumbled and the Federal Reserve was lowering its target rate to an all-
time-low 0.25%.On the other hand, Professor Herman Daly suggests that it is not actually
an economic crisis, but rather a crisis of overgrowth beyond sustainable ecological limits.
This reflects a claim made in the 1972 book Limits to Growth, which stated that without
major deviation from the policies followed in the 20th century, a permanent end of
economic growth could be reached sometime in the first two decades of the 21st century,
due to gradual depletion of natural resources.

Analysis

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 Comparison Unemployment Rate between

The Great Depression (1929) & the Recent Global Meltdown

Chart:-II A linear graph of the unemployment rate from 1920 to 2010

The Great Depression is started from the late 1929s. In 1920s the unemployment
rate was 5.2%. For the Great Depression, the unemployment rate was increased in 1930
& the rate was 8.7%. The unemployment rate of 1950 is less than the unemployment
rate of 1930. It is explained that the Great Depression is almost. Then all developed
country faced this depression. All developed country was taken to overcome this
depression almost 30 years. The main dark phrase of the Great Depression was 1940
because the peak of unemployment rate is the highest (14.6%). The unemployment rate of
1950 is 5.3%. The unemployment rate of 1960 and 1970 are respectively 5.5% and
4.9%.We can easily say from the above the chart that in 1980s a small depression is
spread in business world because the unemployment rate is 7.1%. The unemployment rate
of 1990 is decreased from the unemployment rate of 1980. In 2000 the unemployment
rate is the lowest (4%) from the all previous years. After 2000, the unemployment rate is
also increased. The unemployment rate of Recent Global Meltdown (2010) is 5.9% less
than the Great Depression (1930). It is clear that the effect of the Recent Global
Meltdown is less than the effect of the Great Depression. The difference of the

18
unemployment of the Recent Global Meltdown is 2.8% from the Great Depression
(1930).

Investment in Different Sector (government, household and

private corporate) from 1920 to 2010

Chart:-III The dramatic changes that have taken place in India's investment.

The share of investment in GDP, which used to hover around 25%, has gone all
the way up to 40% of GDP. Under normal circumstances, this bodes well, for high
investment presages high GDP growth. But there is a problem. Investment, and
particularly private corporate investment, is highly unstable in all market economies.
Fluctuations of investment are a key source of business cycle fluctuations.

The three components of investment -- government, household and private

corporate -- are expressed as percent of GDP. We see that for the first time in India's
history, in recent years, private corporate investment has exceeded that by the
government. Government investment is based on the budgetary process, and does not

19
change much from year to year. Household investment is also relatively stable. Private
corporate investment moves around substantially, based on the optimism of the private
sector about India's future.

Private corporate investment was at around 5% when Narasimha Rao and

Manmohan Singh unleashed the reforms of the early 1990s. This gave a rise in
investment to 10%. Then the business cycle downturn came about, and it fell back to 5%.
After this, the reforms of the Vajpayee government from 1999 to 2002 were able to
reignite confidence, and private corporate investment went back up to 16% of GDP. The
numerical values seen in the investment pipeline today are simply enormous. The extent
to which it is translated into actual investment spending is of essence to the new logic of
Indian business cycle fluctuations.

If the recent upsurge of private corporate investment reverses itself, we could see a
drop from 16% of GDP to 6% of GDP. Each percentage point of GDP, today, is Rs.50,
000 crore, so we are discussing massive numbers. A ten percentage point decline of
private corporate investment is a decline in investment demand of Rs.500, 000 crore.

Production and Import of Capital Goods from 1920 to 2008

Chart:-IV Production and Import of Capital Goods from 1920 to 2008

The above chart shows that the production and import rate is fall down in 1920 &
1930. The production rate and import rate are slowly grown up till 1970s.In .1980s; all
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industry faced a short depression. After 2000, all business falls in the recession. It is still
running.

In 1929, all level employees of the industry faced problem for the depression. All
developed country faced the same problem because they are depended on US. But in the
recent global meltdown has fallen the effects on the top level managers.

Conclusion

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 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 10-year 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 ultra
loose 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.

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-to-earnings ratios remain high because of unprecedented falls 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 2007and in March 2009;
U-3 unemployment reached 8.5%.In March 2009, statistician John Williams "argue[d]
that measurement changes implemented over the years make it impossible to compare the
current unemployment rate with that seen during the Great Depression"

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 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 this situation is that the causes of this financial crisis were from the
shadow banking system. "The 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."

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.

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 1980–1982 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.
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 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 6, 2009 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 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."

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 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.

References
1. Sarkhel. Jaydeb 2007 Macroeconomic Theory Kolkata: Book Syndicate
Private Limited.

2. Dutt & Sundaram 2006 Indian Economy Delhi: S.Chand

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3. Frank, Robert H.; Bernanke, Ben S. 2007 Principle of Macroeconomics
Baston: McGrow-Hill

4. http://en.wikipedia.org/wiki/Late-2000s_recession

5. http://en.wikipedia.org/wiki/Great_Depression

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