The current economic crisis is a result of deregulation in the economies leading to decreased interest rates. The increase in inequality has affected the demand and supply of goods and services. The effect on the demand has forced individuals to consume more and pressure was exerted in housing. Due to the decrease in interest rates, the saving rate has declined and the debts have increased. The supply effect was a result of the increase in demand and, the remaining amounts were invested in the real estate and the stock exchange. This has flooded the market with high-risk credit instruments since the interest rates remained low. The situation worsened when a big portion of wealth and income was controlled by the rich. The competition increased and through supportive actions amongst themselves they gained command over the political and economic situations. This group of people controls the institutions of education and media and, came up with a tax cut policy favoring the wealthy (Jon and Barton 2-3). When the international group of economists met in Paris, they said that the crisis began from the imbalances in saving and investment and, the deficits in trade. Also due to the corruption and mismanagement of the financial system in the US, that has caused a market disorder and, the collapse of the regulatory authority.
The current crisis began in the US, unlike the great depression which might have begun from the margin of the global system. Unlike the great depression of the 1930s which might have resulted from credit contraction due to bank failures, the current crisis was mainly a result of the crash in the stock exchange. The reason why these two are similar is that they both cause a severe credit freeze and financial solutions will be the only way out. The great depression was a change in the structure of the growth and the development of the economy which was of adverse effect to the entire economy and not only the monetary sector. The depression was an economic disaster that shifted the income to corporate profits and further away from consumption. The surplus capital was not invested in the production of goods thus no profits were gained (James 36-40).
The great resemblance of the current crisis and the great depression is the cause of both and the fact that they affected the income distribution to profits rather than wages, and consumption. Also, they have affected the financial institutions and despite the assistance being offered to them, they are still not able to end the credit freeze. The current crisis has not reached the level of the great depression though they share most characteristics. In addition, the management of both crises needed a similar monetary policy to resolve. The credit freeze compromised consumer confidence and borrowing. Spending is also diminishing as the unemployment level is rising, more bank foreclosures, bankruptcies of corporate and stagnating wages. However, in the 1930’s depression, the government took a lot of years to respond, and in 2008, they acted immediately. The stages in which the crisis occurred are similar to that of the depression (Colander 3).
One of the policies to tackle the crisis is to put to an end the foreclosures experienced by the citizens in the US. The Recovery and Reinvestments Act passed in February 2009, caters to the homeowners, and affordable finances are offered to the first-time home buyers and, the existing owners to enable them to stay in their homes. Another policy is to stabilize the oil prices by selling oil from the SPR so that the middle class can also have access to the commodity. The US administration should also work with the countries that export food so that they can reduce the restrictions imposed on exports. This will reduce the pressure of the Federal Reserve regarding the dollar. There should be moves to repair the damage in the financial system before the crisis gets worse. Strong regulators should be appointed in the Federal Reserve Board and the best staff should be retained through proper remuneration. A stimulus package will be necessary to enable the economy to resume to normal (Galbraith 20-22).
The creation of jobs is the leading and best policy action because, besides addressing the essential human rights, it is cost-effective. A job offer will cost the government a very small portion of the budget. When private employment is encouraged, most of the money will leak to the profits. The creation of jobs is far much cheaper than the tax cuts which have no immediate job creation because the multiplier effect is small. With the Obama plan, jobs will definitely be created but, they will end up spending this income on the purchase of goods and services offered by the private sector. The labor in the government sector will tend to decline since they will be hired by the private firms that offer them higher employment (Pavlina 4).
The International Monetary Fund (IMF) prefers to lend money to the nations that have backing on their national governments. During periods of crisis, most countries need funds from the IMF to recover, but there are always restrictions put in place making it very hard for these countries to access any assistance. Oligarchies that are emerging establish huge businesses with these debts. Local banks get pressure from the government to extend credit to the elites and this results in borrowing. This is what is referred to as a ‘quiet coup’ as it seems that only those businesses and nations with power can access credit at the time of the crisis (Simon par. 11).
Although the current economic crisis possesses some similarities with the great depression, it is different. The government action on the crisis has been fast and there are policy actions in place to ensure that the crisis to not get to the extent of the depression. If the policy actions are implemented accordingly, the crisis will come to an end without causing a lot of damage to the economy.
Colander, Rothschild. “The Macro Economy Policy in 2009 Financial Crises, Panic and Macroeconomic policy.” Macroeconomics 2009.
James, Galbraith. “Policy and Security Implications of the Financial Crisis: A plan for America.” Challenge 51.6 (2008): 6-25.
James, Livingston. “The Crisis: Their Great Depression and Ours.” Challenge 52.3 (2009): 34-51.
Jon, Wisman and Barton, Baker. “Increasing Inequality, Status Inequality, Ideology and the Financial Crisis of 2008.” Working Paper (2009): 14.
Pavlina, Tcherneva. “Obama’s job creation promise: A modest proposal to guarantee the he meets and exceeds expectations”, The Levy Economics institute. 2009. Web.
Simon, Johnson. “The quiet coup”, The Atlantic. 2009. Web.