Compare and Contrast the Response of Economic Policymakers to the Great Depression of the 1930’s and the Great Financial Crisis Today.

David Pattinson Industrialisation, Imperialism and Globalisation The foundation Economy since 1800 Professor can buoy Singleton Compare and contrast the receipt of sparing form _or_ constitution of governingmakers to the spacious clinical depression of the 1930s and the owing(p) pecuniary Crisis today. Essay 2 10/1/13 Word count 2,299 The financial crisis that began in 2007-8 was the first time since the 1930s that twain the major European countries and the US had been involved in a financial crisis.com/financial-statements-2/ pecuniary StatementsIn comparison, the disastrous 1931 swaning crisis involved countries that accounted for 55. 6 per cent of world GDP, whereas the banking crisis of 2007-8 and involved countries that accounted for 33. 5 per cent of world GDP. Though, either the key sparing variables fell at a faster rate during the first course of instruction of the later crisis. Keynes had argued in 1931 that there is a possibility that when this crisis i s looked back upon by the economic historian of the future it will be seen to mark sensation the major turning points. Keynes was correct.As a ending of the lessons that were learned, form _or_ system of government in repartee to the corking financial Crisis has contrasted sharply with insurance polity during the keen first gear era. I will examine how national policy rejoinders and international co-operation feel differed, as well as highlighting how in creating the Euro, policymakers see unwittingly replicated many a(prenominal) of the structural weaknesses of the Gold Standard. I will also consider how policy in the retrieval phase has so far compared to policy during the recovery from the Great Depression.The Great Depression was marked by bank failures. A total of 9,096 banks failed between 1930 and 1933 amounting to 2. 0% of GDP. Friedman and Schwartz highlight the failure to summation the currency supply whilst liquid state was tight as the primary cause. Bo rdo and Landon-Lane provide econometric analysis using examiners reports on failed banks that incarnate this argument. Epstein and Ferguson have suggested that federal official arriere pensee officials understood that fiscal conditions were tight but believed that a contraction was a demand corrective. The otion that governments should let nature take its course formed a central pillar of the contemporary economic orthodoxy. However, a nonher(prenominal) economic historians have pointed out that federal officials believed that financial policy was actually loose, due to them conflating d sufferhearted nominal interest pass judgment with low real interest rank (which were high as a turn out of deflation). Wicker argues that Federal halt officials feared that open market purchases would re vernal princely outflow by knead into question the Federal take fors commitment to maintaining florid convertibility.When face up with a policy choice the Federal reliever always o pted to support the Gold Standard. Rather than shore up the battered banking system, the Federal Reserve raised interest rates during late 1931 and the winter of 1932-3 to protect the buck from speculation in order to halt gold losses. Regardless of the deficiencies of Federal Reserve policy, the US entered the 1930s with a poorly regulated banking system that was under groovyised and based on whole banking. Calomiris and Mason argue that eventually, banking disperse would have been inevitable.In general, economists argue that the depth of the downturn is explained by the monetary shocks interacting with the dramatic go in demand (that emanated from the collapse in directment and consumption). Loss of income and unsettled employment conditions combined to undermine consumer spending, whilst there was little incentive to invest while prices were falling. Deflation also increased the burden of existing debt. financial policy did non fill the gap in demand as opinion in the Gol d Standard and balanced budgets prevailed.A coherent theoretical ac hold upledgment for expansionary financial policy was absent from the contemporary economic discourse. Expansionary fiscal policy remained unused, even afterwardswards states left the Gold Standard. In Europe, fears of inflation weighed ponderous on the minds of policymakers. The dominant view in Washington was that over-production was responsible for the crisis. Consequently, the novel Deal spending was funded by tax increases. Roosevelt concentrated on limiting competition, sharing work and promoting high yield in order to increase purchasing power.Cole and Ohanian argue that these policies undermined the recovery by raising real wages and unemployment. The consensus view is that, by subordinating monetary and fiscal policy towards maintaining gold parity, the Gold Standard transmitted the crisis to the rest of the world. The return to the Gold Standard, after the First World War, was unbalanced. Countries such as France and Belgium joined at transpose rates that were well below their 1913 levels which gave them a substantial competitive advantage. Conversely, after a deflationary squeeze, the UK re-joined at its 1913 supervene upon rates, leaving the sterling over-valued.The US and France exasperated the problem, by sterilising (so not to inflate the money supply) the gold that they salt away (sixty per cent of the worlds gold supply by 1928). The omit of reserves forced many countries into further deflation. The world economy could entirely be kept going by the US economy proceed to absorb imports and provide international lending to cover gold shortages. By 1928, the US prove unwilling to do the latter and was eventually otiose to do the former. During the depression, this austerity debilitated economies and resulted in banking collapses, notably in Germany and Austria.In response to the general threat posed by the impendent German banking collapse, the nations in a posi tion to flip assistance acted unilaterally. President Hoover proposed a one year moratorium on reparations and war debt. The French, furious at the omit of consultation opposed the measure, believing that they lost more than they gained. Instead, they made an offer of help to the Germans that attached political conditions that made it impossible for the Germans to accept. Ultimately, international co-operation proven impossible as states that were able to help were unwilling to risk their own privileged positions.Between 1929 and 1932, the volume of world trade fell by 25%, about half of which was due to higher trade barriers. The Smoot-Hawley spiel in 1930 is often cited as the genesis of protectionist policies, but Irwin points out that the protectionist avalanche did not begin until the world financial crisis struck in 1931. Irwin locates the incipience of this rotary of protectionism in the open economy trilemma which limits countries to choosing two of three objectives a h ardened commutation rate, an independent monetary policy, and open trade policies.In attempting to marry social status of the Gold Standard with independent monetary policy, policymakers adopted protectionist measures. Countries that maintained gold parity such as France and Switzerland used import quotas on 50-60% of their imports. Whereas, the colossalest block countries which allowed their currencies to devalue, lone(prenominal) used import quotas on 5-10% of their imports. In the inflame of the financial meltdown, policymakers in the US attempted significant banking reform with the tinge entrusting Act in 1933 followed by the brinking Acts of 1933 and 1935. Deposit insurance was created, and it brought an end to bank runs.The Reconstruction Finance Corporation was formed to provide capital to banks. It was thriving to the extent that it owned stock in nearly half of all commercial banks by March 1934. Investment and commercial banking were separated, though purity has provided evidence that banks that engaged in both commercial and investment banking were meliorate diversified and were less likely to fail than banks that specialised in dependable one area. Calomiris also sees the legislation as flawed, as it preserved unit banking, which was a major source of instability in the banking system.The Great Depression altered economic thinking and policy. Hannah and Temin argue that it led to an emphasis on correcting market failures through government intervention. Federal spending rose, and inter-state transfers became acceptable. Though, unlike the UK, there was no move to Keynesian demand management in the US. The Great Depression also left a legacy in price of the macroeconomic trilemma. Controls on international capital movements remained with the return to pegged fill in rates under the Bretton Woods Agreement which allowed independent monetary policy.Economists such as Wray have seen the policy legacy of the Great Depression as having labo red the destabilising role played by finance. Moreover, it provided the manakin for an unprecedented period of successfulness after the Second World War. In response to the Great fiscal Crisis, policymakers have been largely cognisant of the lessons of the 1930s. The Federal Reserve officials of the 1930s argued that they could not increase conviction by purchasing government securities as they were not eligible as collateral.In contrast, based on Bernankes view that banking collapse leads to a failure of the credit allocation mechanism, the Federal Reserve combine with the Treasury created a range of extensions to its discount window to encompass both kind of collateral in the hope of unblocking the credit markets. States co-ordinated huge injections of liquidity (double digits fractions of GDP in right economies). The Bank of England, the Bank of Japan and the Federal Reserve undertook large scale quantitative easing. Interest rates were trim back to almost zero in the US a nd Britain and to very low levels in Europe and elsewhere.Governments nationalised insolvent institutions deemed too big to fail such as Freddie Mac and Fannie Mae in the United States, BNP Paribus in France and nonethern Rock in Britain. Despite chinas minimal direct exposure to the financial crisis, its response to the downturn in demand has been sweeping. Focusing on growing infrastructure it undertook a stimulus package that amounted to 14% of GDP in 2008. Keen notes that the massive amount of government spending in 2010 meant that government debt was responsible for 12% of aggregate demand in contrast to only 1. % of aggregate demand between 1930 and 1932. Furthermore, unlike the 1930s, governments have not try to over-ride, the now lots larger, automatic stabilisers. However, the experience of the 1930s has not in effect militated upon the policy makers of the Eurozone, where a dramatic collapse in employment and victuals standards has mirrored the Great Depression. Like the Gold Standard, the Euro was unbalanced from its inception as the weaker economies joined at a relatively high rate of supercede on the premise of avoiding inflation.The gap in competitiveness has widened due to Germany suppressing nominal wages much more effectively than the rest of the Eurozone. Easy credit provided to peripheral areas by German banks created markets for German exports and saddled those areas with debt. financial and fiscal policy has focused on creating an international currency to rival the dollar. Consequently, monetary policy has targeted inflation through low interest rates. As monetary policy is unitary, the peripheral economies are denied the opportunity to reflate their economies.Furthermore, unlike other major advanced economies since the crisis began, the Eurozone has required that monetary policy be put under tight constraints via the pecuniary Stability Pact. The retrenching of the crisis on to sovereigns has exposed a central weakness of the E urozone project. The ECB supports banks but lacks the power to support states. Similar to the deflation that was necessary under the Gold Standard, the peripheral economies of the Eurozone are locked into a mutually reinforcing daily round of debt and austerity.Having pursued national self-interest from the euros inception, Vines argues Germany is unwilling to provide the hegemonic lead that its responsibilities in Europe require of it. Though, Lapavitas et al argue that abandoning fiscal field of operation would be incompatible with the avowed aim of maintaining a currency that attempts to grapple with the dollar. The value of the euro would probably fall, destroying the large Eurozone banks ability to operate internationally. If German policy has followed narrow self-interest to the detriment of others, it has not been alone. china has held down their exchange rates over a long period of time.It is widely estimated that Chinese currency is 30% to 40% overvalued. Martin Wolf o f the financial Times has insist that Chinese interventions to keep the exchange rate down are equivalent analytically to trade protectionism. Judging by its reserves it has kept its exchange rate down to a degree unmatched in economic history. States have also been quick to ring-fence assets in their own jurisdiction. For example, the fear of the imminent collapse of the Icelandic banks led UK supervisors to resort to using the Anti-Terrorism, Crime and earnest Act to ring fence Icelandic bank assets in the UK.Claessens et al point out that in general, national interventions have been uncoordinated and goaded by pure national interest. However, the major international banks have co-ordinated massive injections of liquidity into the system at various points. Moreover, protectionism has not been a feature of the current crisis in the way that it was during the great depression. research has shown that only 2% of falls in world trade in 2008-9, can be attributed to trade barrier s. This can be primarily attributed to the system of flexible exchange rates, the lessons learnt from the great depression and the system of trade rules overseen the WTO.As of yet following the great financial crisis, there has not been significant banking reform. Attempts at co-ordinated international rule have proved difficult. The former governor of the Bank of England Mervyn King attributes this to the heightened sensation that global banks are global in life and national in death. The draft proposals for the Basel III accords put forward some significant reforms which were in conclusion watered down. Key elements such as a mandatory countercyclical capital buffer were omitted from the final agreement.Although the accords raised the minimum capital requirements, they are even so held by many economists to be too low. Attempts at reform including the Dodds-Frank Act have not addressed the problem of Too Big to plump Banks (whose size necessitates that they be bailed out in t he event of insolvency due to the systemic risk that they pose). A situation of moral hazard thereby exists where banks know they can engage in any risky behaviour they like. If anything should go wrong they know they will be bailed out by the state.In summary, the response to the Great monetary Crisis has differed from the Great Depression as a result of the increased understanding of macroeconomics. The scale of the policy response to the Great Financial Crisis would have been unthinkable during the Great Depression era. Despite the unprecedented response, the economic crisis that began with the financial crisis in 2007-8 is far from over and many problems remain. In the advanced economies, growth has been weak and fears of a triple dip recession persist. The Great Depression precipitated a reappraisal of policy by policymakers and resulted in grand changes in policy.This has not happened so far to the same extent in response to the Great Financial Crisis. Many of the policy mis takes of the Great Depression have been avoided. The challenge now is to construct a macroeconomic framework that can aid the recovery and eventually facilitate a new period of economic expansion. The change in policies as a result of the Great Depression had some success in this respect. Banking regulation proved inadequate prior to both crises. In response to the Great Financial Crisis, this has yet to be rectified. This time policymakers will have to tackle the exhaust of too big to fail banks.In the Eurozone, Germany has taken on the role of both the US and France during the Great Depression by failing to shore up weaker areas and by pursuing policies to the detriment of everybody else. During the Great Depression, the most important element in the recovery was the abandonment of the Gold Standard. The countries that devalued in 1931 performed much better than those who had continued with exchange controls. The cost of reverting back to a national currency makes leaving the Eu ro and devaluing a less viable extract for the Eurozone states. Bibliography Barrell, R. and Holland, D. monetary and Fiscal Responses to the economical Downturn, study Institute scotch polish, zero(prenominal) 211, (Jan 2010) pp. 51-62. Bernanke, B. , nonemonetary Effects of the Financial Crises in the extension phone of the Great Depression, American economic Review (June 1983), pp. 257-76. Bordo, M. and Landon-Lane, J. , The banking panics in the United States in the 1930s some lessons for today, Oxford Review of sparing insurance, Vol. 26, nary(prenominal) 3, (2010), pp. 486509. Calomiris, C. and Mason, J. , Consequences of Bank Distress during the Great Depression, American economical Review, Vol. 93, (2003a), pp. 93747.Calomiris, C. , Monetary constitution and the Behavior of Banks Lessons from the 1930s for the 2010s. 28th March 2011. 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Fearon, Lessons from the 1930s Great Depression, Oxford Review of Economic Policy, Vol. 26, No. 3, (2010), pp. 287 2 . J. M. Keynes, An Economic Analysis of Unemployment, from Q. Wright (ed. , Unemployment as a World Problem, (Chicago University of Chicago Pr ess, 1931). 3 . C. Calomiris and J. Mason, Consequences of Bank Distress during the Great Depression, American Economic Review, Vol. 93, (2003a), pp. 93747 4 . M. Friedman and A. Schwartz, A Monetary History of the United States, 1867-1960, (Princeton Princeton University Press, 1963) 5 . M. Bordo and J. Landon-Lane, The Banking Panics in the United States in the 1930s Some Lessons for Today, Oxford Review of Economic Policy, Vol. 26, No. 3, (2010), pp. 486509 6 . G. Epstein and T.Ferguson, Monetary Policy, Loan Liquidation, and Industrial Conflict The Federal Reserve and the Open Market Operations of 1932, Journal of Economic History (December 1984), pp. 957-83. 7 . P. Fishback, US Monetary and Fiscal Policy in the 1930s, Oxford Review of Economic Policy, Vol. 26, No. 3, (2010), p. 394. 8 . E. Wicker, Federal Reserve Monetary Policy, 1917-1933, (Random House, 1966) 9 . Crafts and Fearon, Lessons from the 1930s Great Depression, p. 292 10 . Calomiris and Mason, Consequences of Bank Distress during the Great Depression, pp. 93747 11 .Crafts and Fearon, Lessons from the 1930s Great Depression, pp. 291-3 12 . Fishback, US Monetary and Fiscal Policy in the 1930s, pp. 401-5 13 . Cole and Ohanian, New Deal Policies and the Persistence of the Great Depression A General Equilibrium Analysis, Federal Reserve Bank of Minneapolis Research Department, Working Paper No. 597, (July 2000), p. 41. 14 . ibid. pp. 294-5 15 . Crafts and Fearon, Lessons from the 1930s Great Depression, pp. 295 16 . D. Irwin, Trade Policy Disaster Lessons from the 1930s, (Cambridge MIT Press, 2011) Ch. 1 17 . Ibid. , Ch. 4 18 .Crafts and Fearon, Lessons from the 1930s Great Depression, pp. 304-5 19 . E. White, Before the GlassSteagall Act An Analysis of the Investment-banking Activities of National Banks, Explorations in Economic History, Vol. 23, (1986), pp. 3355. 20 . C. Calomiris, Monetary Policy and the Behavior of Banks Lessons from the 1930s for the 2010s. 28th March 2011. Accessed sixteenth December 2011. www. economics21. org/files/pdfs/in-depth /calomiris-spring-11. pdf 21 . L. Hannah and P. Temin, (2010), Long-term Supply-side Implications of the Great Depression, Oxford Review of Economic Policy, Vol. 26, No. , (2010), pp. 56180 22 . White, Before the GlassSteagall Act An Analysis of the Investment-banking Activities of National Banks, pp. 3355. 23 . L. Wray, The Rise and Fall of Money Manager capitalism A Minskian Approach, Cambridge Journal of Economics, Vol. 33, (2009) pp. 813 24 . Bernanke, B. , Nonmonetary Effects of the Financial Crises in the Propagation of the Great Depression, American Economic Review (June 1983), pp. 257-76. 25 . R. Barrell and D. Holland, Monetary and Fiscal Responses to the Economic Downturn, National Institute Economic Review, No. 211, (Jan 2010) p. 56 26 . Y.Yu, Chinas Policy Responses to the Global Financial Crisis, Richard Snape Lecture, Productivity Commission, Melbourne (25th November 2009) pp. 9-10 27 . S. Keen, Empirical and theoretical reasons why the GFC is not behind us. 13th June 2010. Accessed 16th December 2011 28 . C. Lapavitsas et al, Eurozone crisis beggar thyself and thy neighbour, Journal of Balkan and Near Eastern Studies, Vol. 12, No. 4 (2010), p. 367 29 . D. Vines, Fiscal Policy in the Eurozone After the Crisis, Paper prepared for lunchtime talk at Macro Economy Research Conference on Fiscal Policy in the Post Crisis World, (Tokyo, 16 November, 2010). 30 . Lapavitsas et al, Eurozone crisis beggar thyself and thy neighbour, p. 367 31 . D. Vines, The Global Macroeconomic Crisis and G20 Macroeconomic Policy Coordination, The Journal of Applied Economic Research, Vol. 4, No. 2, (2010) pp. 157-175 32 . M. Wolf, Why Chinas Exchange Rate Policy Concerns Us, Financial Times (8th of December 2009) 33 . S. Claessens et al, Lessons and Policy Implications from the Global Financial Crisis, IMF Working Paper, No. 14 (2010) p. 16 34 . L. Kee et al, Is Protectionism on the R ise?Assessing National Trade Policies during the Crisis of 2008, World Bank Policy Research Working Paper No. 5274, (2010), p. 3 35 . E. Helleiner and S. Pagliari, The End of an Era in International Financial Regulation? A Postcrisis Research Agenda, International Organization, Vol. 65, (Winter 2011), p. 184 36 . M. Goldstein, Integrating Reform of Financial Regulation with Reform of the International Monetary System, Peterson Institute for International Economics, Working Paper No. 11-5 (February 2011), pp. 5-7. 37 . Crafts and Fearon, Lessons from the 1930s Great Depression, pp. 311