Other causes identified in the report included excessive borrowing by consumers and corporations and lawmakers who were not able to fully understand the collapsing financial system.
Federal Reserve pushed interest rates to the lowest levels seen up to that time in the post-Bretton Woods era in an attempt to maintain economic stability. The Fed held low interest rates through mid Combined with federal policy to encourage home ownership, these low interest rates helped spark a steep boom in real estate and financial markets and a dramatic expansion of the volume of total mortgage debt.
Financial innovations such as new types of subprime and adjustable mortgages allowed borrowers, who otherwise might not have qualified otherwise, to obtain generous home loans based on expectations that interest rates would remain low and home prices would continue to rise indefinitely.
However, from through , the Federal Reserve steadily increased interest rates in an attempt to maintain stable rates of inflation in the economy. As market interest rates rose in response, the flow of new credit through traditional banking channels into real estate moderated. Perhaps more seriously, the rates on existing adjustable mortgages and even more exotic loans began to reset at much higher rates than many borrowers expected or were led to expect. The result was the bursting of what was later widely recognized to be a housing bubble.
During the American housing boom of the mids, financial institutions had begun marketing mortgage-backed securities and sophisticated derivative products at unprecedented levels. When the real estate market collapsed in , these securities declined precipitously in value.
The credit markets that had financed the housing bubble, quickly followed housing prices into a downturn as a credit crisis began unfolding in The solvency of over-leveraged banks and financial institutions came to a breaking point beginning with the collapse of Bear Stearns in March The contagion quickly spread to other economies around the world, most notably in Europe.
As a result of the Great Recession, the United States alone shed more than 8. Bureau of Labor Statistics, causing the unemployment rate to double. S Department of the Treasury. The Great Recession's official end date was June The Dodd-Frank Act enacted in by President Barack Obama gave the government control of failing financial institutions and the ability to establish consumer protections against predatory lending. The aggressive monetary policies of the Federal Reserve and other central banks in reaction to the Great Recession, although widely credited with preventing even greater damage to the global economy, have also been criticized for extending the time it took the overall economy to recover and laying the ground work for later recessions.
This massive monetary policy response in some ways represented a doubling down on the early 's monetary expansion that fueled the housing bubble in the first place.
Along with the inundation of liquidity by the Fed, the U. These monetary and fiscal policies had the effect of reducing the immediate losses to major financial institutions and large corporations, but by preventing their liquidation they also keep the economy locked in to much of the same economic and organization structure that contributed to the crisis.
Not only did the government introduce stimulus packages into the financial system, but new financial regulation was also put into place. According to some economists, the repeal of the Glass-Steagall Act —the depression-era regulation—in the s helped cause the recession.
Some decision makers misinterpreted signals about the state of the economy, such as the nominal interest rate, because of their adherence to the real bills philosophy. Others deemed defending the gold standard by raising interests and reducing the supply of money and credit to be better for the economy than aiding ailing banks with the opposite actions.
On several occasions, the Federal Reserve did implement policies that modern monetary scholars believe could have stemmed the contraction. In the spring of , the Federal Reserve began to expand the monetary base, but the expansion was insufficient to offset the deflationary effects of the banking crises. In the spring of , after Congress provided the Federal Reserve with the necessary authority, the Federal Reserve expanded the monetary base aggressively.
The policy appeared effective initially, but after a few months the Federal Reserve changed course. A series of political and international shocks hit the economy, and the contraction resumed. Congress responded by reforming the Federal Reserve and the entire financial system. Under the Hoover administration, congressional reforms culminated in the Reconstruction Finance Corporation Act and the Banking Act of These agencies dominated monetary and banking policy until the s.
The creation of the modern intellectual framework underlying economic policy took longer and continues today. Bernanke, Ben. Essays on the Great Depression. Princeton: Princeton University Press, Chandler, Lester V.
American Monetary Policy, to New York: Harper and Row, New York: Harper Collins, Eichengreen, Barry. Friedman, Milton and Anna Schwartz. A Monetary History of the United States: Kindleberger, Charles P. Berkeley: University of California Press, This period was accentuated by a number of economic contractions, including the stock market crash of and banking panics that occurred in and Economists and historians often cite the Great Depression as one of the largest—if not the most—catastrophic economic events of the 20th century.
During the short depression that lasted from to , known as the Forgotten Depression, the U. The U. The Roaring Twenties, as the era came to be known, was a period when the American public discovered the stock market and dove in headfirst. Loose money supply and high levels of margin trading by investors helped to fuel an unprecedented increase in asset prices. The lead-up to October saw equity prices rise to all-time high multiples of more than times after-tax corporate earnings.
A brief rally occurred Friday the 25th and during a half-day session Saturday the 26th. In , the economic calamity hit both continents in full force. The stock market crash wiped out nominal wealth, both corporate and private, sending the U.
In early , the U. Despite unprecedented interventions and government spending by both the Hoover and Roosevelt administrations, the unemployment rate remained above Real per capita gross domestic product GDP was below levels by the time the Japanese bombed Pearl Harbor in late While the crash likely triggered the decade-long economic downturn, most historians and economists agree that the crash alone did not cause the Great Depression.
Nor does it explain why the slump's depth and persistence were so severe. A variety of specific events and policies contributed to the Great Depression and helped to prolong it during the s. The relatively new Federal Reserve mismanaged the supply of money and credit before and after the crash in Created in , the Fed remained inactive throughout the first eight years of its existence.
After the economy recovered from the to depression, the Fed allowed significant monetary expansion. Bank deposits increased by By increasing the money supply and keeping the interest rate low during the decade, the Fed instigated the rapid expansion that preceded the collapse. Much of the surplus money supply growth inflated the stock market and real estate bubbles.
After the bubbles burst and the market crashed, the Fed took the opposite course by cutting the money supply by nearly a third. This reduction caused severe liquidity problems for many small banks and choked off hopes for a quick recovery. As Bernanke noted in a November address, before the Fed existed, bank panics were typically resolved within weeks. Large private financial institutions would loan money to the strongest smaller institutions to maintain system integrity.
That sort of scenario had occurred two decades earlier, during the Panic of Morgan stepped in to rally Wall Street denizens to move significant amounts of capital to banks lacking funds. Ironically, it was that panic that led the government to create the Federal Reserve to cut its reliance on individual financiers such as Morgan. After Black Thursday, the heads of several New York banks had tried to instill confidence by prominently purchasing large blocks of blue-chip stocks at above-market prices.
While these actions caused a brief rally Friday, the panicked sell-offs resumed Monday. In the decades since , the stock market grew beyond the ability of such individual efforts. Now, only the Fed was big enough to prop up the U. The Fed failed to do so with a cash injection between and Instead, it watched the money supply collapse and let thousands of banks fail.
At the time, banking laws made it very difficult for institutions to grow and diversify enough to survive a massive withdrawal of deposits or run on the bank. While difficult to understand, the Fed's harsh reaction may have been the result of its fear that bailing out careless banks would only encourage fiscal irresponsibility in the future.
Some historians argue that the Fed created the conditions that caused the economy to overheat and then exacerbated an already dire economic situation. Herbert Hoover took action after the crash occurred even though he's often characterized as a "do-nothing" president. Between and , he implemented:.
Hoover was mainly concerned with the fact that wages would be cut following the economic downturn. He reasoned that prices needed to stay high to ensure high paychecks in all industries. To keep prices high, consumers would need to pay more. But the public was burned badly in the crash, leaving many people without the resources to spend lavishly on goods and services.
Nor could companies count on overseas trade , as foreign nations were not willing to buy overpriced American goods any more than Americans were.
Roosevelt won an overwhelming victory in the presidential election. By Inauguration Day March 4, , every U. Nonetheless, FDR as he was known projected a calm energy and optimism, famously declaring "the only thing we have to fear is fear itself. Among the programs and institutions of the New Deal that aided in recovery from the Great Depression were the Tennessee Valley Authority TVA , which built dams and hydroelectric projects to control flooding and provide electric power to the impoverished Tennessee Valley region, and the Works Progress Administration WPA , a permanent jobs program that employed 8.
When the Great Depression began, the United States was the only industrialized country in the world without some form of unemployment insurance or social security. In , Congress passed the Social Security Act , which for the first time provided Americans with unemployment, disability and pensions for old age.
After showing early signs of recovery beginning in the spring of , the economy continued to improve throughout the next three years, during which real GDP adjusted for inflation grew at an average rate of 9 percent per year. Though the economy began improving again in , this second severe contraction reversed many of the gains in production and employment and prolonged the effects of the Great Depression through the end of the decade.
German aggression led war to break out in Europe in , and the WPA turned its attention to strengthening the military infrastructure of the United States, even as the country maintained its neutrality. One-fifth of all Americans receiving federal relief during the Great Depression were Black, most in the rural South.
But farm and domestic work, two major sectors in which Black workers were employed, were not included in the Social Security Act, meaning there was no safety net in times of uncertainty. Rather than fire domestic help, private employers could simply pay them less without legal repercussions. And those relief programs for which blacks were eligible on paper were rife with discrimination in practice, since all relief programs were administered locally.
The number of African Americans working in government tripled. There was one group of Americans who actually gained jobs during the Great Depression: Women. From to , the number of employed women in the United States rose 24 percent from The 22 percent decline in marriage rates between and also created an increase in single women in search of employment. Women during the Great Depression had a strong advocate in First Lady Eleanor Roosevelt , who lobbied her husband for more women in office—like Secretary of Labor Frances Perkins , the first woman to ever hold a cabinet position.
Jobs available to women paid less, but were more stable during the banking crisis: nursing, teaching and domestic work.
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