A Comparative Study of The Financial Crisis of 1928 and The Present Day Financial Crisis

Abstract

Several financial crisis of the present day can be compared to the great depression that was witnessed in 1928 with similarities being based on the causes and effects of the two events. In comparing the two financial crises, it is significant to analyze the role of consumption, investment, and uncertainty in the economic conditions of the two periods of time. The two events are compared with respect to the effects which directly relates to investment and confidence levels in the economy. A comparison is done between the 1928 economic depression and the recent financial crises such as the 2008 financial crisis. While both the crises are without any doubt global, analysis is primarily done concerning the United States due to the role the country played in the 1928 financial crisis.

Crises, Consumption, Investment, and Uncertainty

Research indicates that financial crises share many core characteristics, the major one being the collapse of asset markets. Market dips in financial crises are termed to be more pronounced in terms of their depth and severity. Research also has it that real housing prices as well as equity prices decline rapidly during periods of financial crises. The financial crisis of 1928 and the financial crises of today are all related to a fundamental breakdown in the financial mechanism of the economy. The periods of great depression and recession of 1928 were periods in which credits often came by. The great depression and the financial crisis of 2008, therefore, share the same situation where over-investment and over-speculation were far more serious since they were conducted with borrowed money. The borrowing of money during the period of great depression in 1928 and the financial crisis of 2008 led to the collapse of banks as a result of excessive borrowing of money for investment (Presbitero, n.d.)

Both the great depression of 1928 and the financial crisis of 2008 were characterized by over-confidence in the economy and poor policy making. During the year 1928 and in the recent financial crises, growth can be described as speculative on the back of an extended period of economic prosperity. The United States, for instance, had a stock market in 1928 that was on a dizzying ride. Stock prices and the daily volume of shares traded, continuing to set records years later. It appears as a shock when a great economic depression is unexpectedly followed by an excessive boom. The same situation that was witnessed after the 1928 period of great depression has been witnessed in the recent times where financial crises are followed by a big fall in consumption due to excessive boom. The two periods are, therefore, associated with a very big fall in fixed investment as well as a big fall in stocks (James, 2013)

Sincerely speaking, the recent financial crises show signs of a drop in consumer confidence and consequently consumers depict less interest in investing and purchasing goods and services. The great period of depression in 1928 was also characterized by a large shift in expectations, leading to a drop in consumer consumption. The periods of financial crisis in recent times have been characterized by non-durables and services that sag immediately, an indication of an increase in consumer uncertainty. On the same note, businesses in the United States of America found it hard to invest during the period of great depression that was experienced globally.

Monetary Policy

In both the recent financial crises and the crises of 1928, monetary policy has played a critical role. It is common knowledge that the authorities played a significant role in causing deflation and in the contraction of money supply. Monetarists’ advocates argue that the situation later contributed to the severity of the crisis. In both periods, there are interventions of using a combination of both fiscal and monetary policies to resolve the damage of the collapse in the economy. Experts argue that a reduction in the monetary stock is an indication of a drop in demand; hence a drop in output and an additional repercussion on employment. It is now clear that vigorous and restrictive policy in the early 1928 and the world today might have broken the stock market boom without it having to be kept in effect long enough to constitute a serious drag on business entities (Ohanian, 2010)

Housing and the Financial Crises

The World War resulted in an imbalance in housing as the growth of dwellings could not match the growing demand from households. The crisis of depression in 1928 further led to a collapse in the mortgage market due to demographic shifts and overbuilding in the residential housing market. Similar events have been happening in the modern world where the freedom of credit and the pervasiveness of sub-prime mortgages have been at the peak. In both periods, the development of complex financial products that have continued to fuel developments in housing has also fuelled the growth and speculative nature of the crises.

Conclusion

A lot of features of the recent financial crises are comparable to the financial crisis of 1928. In both cases, there are repeated cases of a predicament in the stock markets, banking, and housing failures. Financial crises in the past and the world today have significantly affected domestic households and small businesses as the two parties rely on the consumption of goods by the local population and investment from prospective business men.