Ebook From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons
The parallels between the Great Credit Crisis of 2008 and the onset of the Great Depression have been widely commented upon. Paul Krugman posted to his widely-read blog a graph comparing the fall in manufacturing production in the United States from its respective mid-1929 and late-2007 peaks. The Bad Bears“ graph comparing the stock market crashes of 1929-30 and 2008-9 has had wide circulation. Justin Fox has prominently compared the behaviour of payroll employment in the two downturns.
But these authors, like most other commentators, compared the United States then and now, reflecting the fact that the U.S. has been extensively studied and the relevant economic statistics are at hand. This, however, yields a misleading picture. The United States is not the world. The Great Depression and the Great Credit Crisis, even if they both in some sense originated in the United States, were and are global phenomena. The Great Depression was transmitted internationally through trade flows, capital flows and commodity prices. That said, different countries were affected differently depending on their circumstances and policies. Some, France for example, were largely passive, while others, such as Japan, made aggressive use of both monetary and fiscal policies. The United States is not representative of their experiences.
The Great Credit Crisis is just as global. Indeed, starting in the spring of 2008 events took an even graver turn outside the United States, with even larger falls in other countries in manufacturing production, exports, and equity prices. Similarly, different countries have responded differently to the crisis, notably with different monetary and fiscal policies, some more aggressive, others less.
In this paper we fill in the global picture of the two downturns. We show that the decline in manufacturing globally in the twelve months following the global peak in industrial production, which we place in early 2008, was as severe as in the twelve months following the peak in 1929. Similarly, while the fall in the U.S. stock market paralleled 1929 during the first year of the crisis, global stock markets fell even faster than 80 years ago. Another respect where the Great Credit Crisis initially surpassed“ the Great Depression was in destroying trade. World trade fell even faster in the first year of this crisis than in 1929-30, an alarming observation given the prominence in the historical literature of trade destruction as a factor compounding the Great Depression.
At the same time, the response of monetary and fiscal policies, not just in the United States but globally, was quicker and stronger this time. At the time of writing (October 2009), it would appear that global industrial production and trade have stabilized. The question is how much credit to give to monetary and fiscal policies. This too is something on which comparisons with the 1930s may shed light.
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