The Economic Lessons of the Great Depression
The current economic crisis is the most severe in over 70 years, where “banks went bankrupt [and] the stock market fell precipitously” (Colander 1). The lessons of the Great Depression in the early 1930s are being applied in solving today’s economic crisis. The crisis emerged from the United States, where the collapse of the housing market in the US economy drove other markets to get worse around the world. Why today do we face another financial crisis? Was the recent financial crisis just another business cycle that the Fed screwed up because it did not understand the context of the money supply? Or, is it because they misunderstood the Keynesian economics?
The current financial crisis, according to Livingston, is now upon us, mainly because “consumer confidence, spending, and borrowing have been compromised or diminished, if not destroyed, by the credit freeze and the stock market crash” (45). Consumption is decreasing as Americans “confront the conjunction of falling home values, bank foreclosures, stagnant wages, rising unemployment, corporate bankruptcies, and diminished retirement accounts” (Livingston 45). Livingston mentions George W. Bush’s tax cuts which “produced a new tidal wave of surplus capital with no place to go except into real estate,” (47) where the increase in lending against assets that kept increasingly high allowed safe mortgages – that is, according to Livingston, “the conversion of consumer debt into promising investment vehicles” (47). What happened as a result is that corporations earned more than invested – similar situation as in the case of the Great Depression, where the surplus in profits earned made CEOs not knowing where to invest, since the increase in labor productivity and industrial output was made without making net additions to the capital stock. Instead, they save their profits in banks, speculations, and some in the loan market (Livingston 38).