The Greatest Financial Lesson, We Chose to Ignore.

What were the reasons behind 1930s U.S. financial crisis?

The Great Depression was largely caused by series of negative aggregate demand shocks but real shocks
also contributed and slowed recovery. The Great Depression was unlike any recession in recent times,
unemployment rose above 20%, 40% of all banks failed, GDP plummeted by 30% and the Stock market
lost two-thirds of its value in just ten years.

During the Great Depression, thousands of banks failed in four waves and with each wave of bank
failure, fear and uncertainty increased, leading to further reductions in consumption. This decline in
investment spending was another shock to aggregate demand. Overall, investment dropped by an
astounding 75% between 1929 and 1933. By 1940, the capital stock was actually lower than it had been
in 1930. Aggregate demand had already been reduced drastically by 1931, and the U.S. economy was in
bad shape.

But then in early 1930s, the Federal Reserve allowed the money supply to plunge by nearly 30%. The
largest negative shock in aggregated demand in U.S. history. By 1932, the economists estimate that
America’s real growth rate was -13%, and inflation was -10%, a deflation, this extreme deflation made
the situation even worse, because deflation increases the burden of debt and led to further falls in
aggregate demand. The bottom line is that pretty much everyone wanted to spend less, but the only
way that everyone can spend less is if the economy shrinks. And that exactly what happened.

The Great Depression is in many ways the great fall in aggregate demand. But real shocks also
contributed to, and slow the economy’s recovery. The bank failure mentioned earlier actually had two
effects. When people lost their money, they couldn’t spend, and so aggregate demand fell. But,
addition, the banks were financial intermediaries. And so when the banks failed, the bridge between
saving and investment collapsed, and the economy became less efficient. As is often the case real shocks
are often intertwined with aggregate demand shocks.

As if all this wasn’t bad enough, Mother nature added to the problems of the U.S. economy. The dust
bowl, that was another real shock. In the early years of the Great Depression, many states in America
farmland dried up, and literally blew away. Farming became less productive as crops failed, and there
wasn’t enough water for all of the livestock. Between 1930 and 1940, some three and a half million
people in the plains states picked up and moved a mass migration, like the Gold rush, but in reverse.
This was a tremendous hit to the productive capacity of the U.S. agricultural sector.

Several policy decisions also caused negative real shocks. The Smoot-Hawley Tariff, for instance enacted
in 1930, taxed foreign goods, if nothing else had changed, this might have increased aggregate demand
by encouraging spending on domestic goods. But in reality, other countries retaliated with similar tariffs,
so our exports fell. Tariffs were also a real shock to the economy. (Kelly 2017)

Finally, the National Industrial Recovery Act was a terrible piece of legislation. Under the Act, hundreds
of industries government-mandated codes that reduced competition, and prevented firms from
lowering prices. Moreover, at a time when investment was far too low, the Act put quotas on
investment, and made competition in many industries illegal. Fortunately, some of the worst parts of
the Act were declared unconstitutional in 1935. (Wikipedia)
Bibliography

Kelly, Martin, “Top 5 Causes of the Great Depression” thoughtco.com.

https://www.thoughtco.com/causes-of-the-great-depression-104686

Wikipedia, “National Industrial Recovery Act of 1933” wikipedia.org.

https://en.wikipedia.org/wiki/National_Industrial_Recovery_Act_of_1933
 Toxic Assets
What was the impact of 2008 U.S. financial crisis on global financial markets?
Most people actually look to the origin of the financial crisis to the U.S. in particular to the subprime
paper and asset-backed securities were issued for many years largely by U.S. institutions, based upon
U.S. mortgages but it’s actually interesting that a lot of this subprime paper or assets were owned by
foreign investors.

If one country gets into trouble, then other countries kind of moderate, for instance the subprime paper
well it’s not is bad for the U.S. because a lot of these papers held internationally, so it’s not U.S.
investors took all the risk, it was shared, so it moderated the downside for U.S. investors that’s how it
usually, works and as it is called risk sharing.

However, when there is a large crisis it works in the opposite direction, that there isn’t any sharing of
risk because there’s a large systemic event that affects everybody and because of globalization, we are
all connected, so nobody is immune unless it’s a country that is isolated that doesn’t really trade with
rest of the world so this particular crisis it is not just a U.S. subprime crisis it is a global systemic shock
that is affecting many different economies in the world.

As the world which was experiencing a healthy robust economic growth in the first years of the decade
of the 2000s, saw that slipping away in the year 2000 of the growth rate of the global economy was
about 4% by 2009 it had turned negative to about -2% and so, that produced unemployment all across
the globe and poverty levels rose and for 2010 the poverty numbers could increase by 64 million
because of the crisis.

This time, the OECD, of the industrial countries were the primary targets. The crisis originated in these
countries and so the swing in growth rates and unemployment were clearly the largest in the industrial
countries. It is said that developing counties especially the middle income countries and suffered a
setback, and among the regions of developing world Europe and Central Asia was the hardest hit seeing
a growth of around 6% in 2007, and a negative growth of the same magnitude in 2009, Latin America
was too affected, Asia and different degrees. The low income countries especially of sub-Saharan Africa
after a lag also has seen a significant setback in growth, employment and social progress. (Gokay 2009)
Bibliography

Gokay, Bulent. “The 2008 World Economic Crisis: Global Shifts and Faultlines” globalresearch.ca.
https://www.globalresearch.ca/the-2008-world-economic-crisis-global-shifts-and-faultlines/12283