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The Great Crash of 1929 is a widely debated topic on why it occurred. From banks, to the Federal reserve or to new security offerings, there was no concise answer. David M Kennedy, a prominent American historian wrote “The disagreeable truth… is that the most responsible student of the events of 1929 has been unable to demonstrate an appreciable cause and effect” (Klein 326). Though many people equate as being the same, The Great Crash and The Great Depression, the latter was the aftermath of the former. I will look to try and draw some similarities between what happened in 1929, to what happened recently during the past recession during 2008.
Looking at the causes of both events, it is clear to see there was not just one event in either of these circumstances that caused the economy to crash or recede. But one I would like to look at is lending practices. In 1920’s the prosperous economy made it easier for Americans to contact a bank and receive a credit loan to purchase stocks. At the time, it was possible to put down only 10% and receive a 90% loan on stocks (Alert). When the stock market started to crash, these lenders turned back to the investors looking for them to pay off their debts, but many lost the 10% they had put down and depending when they had been asked to repay these debts, most investors had already lost part of the 90% that they had owed (Sandowski). Given the stock market dropped by more than 10% in a day on a few occasions, you can see how many banks ended up having to go bankrupt on this principal alone.
In The Great Recession of 2008 I found a few striking similarities. Subprime Mortgages were a huge part of the financial collapse in 2008. With home prices skyrocketing and banks seeing real estate as easy money, they started giving out high-risk mortgages. Mortgages such as option-ARMs and subprime. These mortgages were given to borrowers with bad credit, or little to no documentation of financial income (Pritchard). Eventually in 2007, home prices stopped appreciating, wages were stagnant and interest rates went up. Borrowers became unable to pay their mortgage and many let the banks foreclose on them. Foreclosures in 2008 spiked up a staggering 81% (Christie). While banks usually would recoup the money that they had lent out by selling the house they had foreclosed on, home values had plummeted 18% (Christie). Leaving many banks to take heavy financial losses and leading to some having to take government bailouts to stay afloat.
Both economies would eventually recover. After the 2008 recession we suffered from the slowest recovery since the great depression based on the rate of growth (Long, Luhby). Though the past two years have seen GDP’s almost double (Healey), and stock markets hit all time highs it is safe to say we have finally, after 10 years fully recovered from the recession. But what were the steps that made us recover? One thing the Bush government did in response to the faulty loans banks had given out was they started buying these risky mortgage bonds and assured investors around the world that the U.S banks would pay off their debts (Gimein). Knowing that the United States would not default on these debts, many investors regained confidence in the current financial situation.
Many believe the end to the Great Depression happened when the United States entered WWII. With more than 12 million Americans joined the military, and a similar amount entered defense related job, it seemingly eroded the 17 million in unemployment the nation had at the time (Folsom). But through this all, if there is one lesson to be learned, I think it’s a simple one. If you can’t afford it, don’t buy it. Essentially, don’t live above your means