The causation of the 2007 recession is well documented by academics. However, in order to discuss whether or not politicians did in fact learn the lessons of history from the 1929 Crash, it is important to analyse to what extent the two crashes were similar. Therefore, without going into too much detail, I shall quickly evaluate the causation, effects, and response to the 2007 Financial Crash.
Throughout the late 90s and early 2000s, the American housing market has been booming, exponentially growing in value from year to year, fuelled by cheap mortgages and help to buy schemes. As we have discussed before, this unsustainable growth creates a climate of overvaluation, resulting in the creation of a housing bubble. Therefore, as soon as the housing market crashed and subprime loans expired; households were unable to pay back expensive mortgages, meaning that huge established banks (such as Leheman Brothers) went bust. Consumer and investor confidence evaporated, which combined with the bank’s lack of credit, resulted in a credit crunch. The consequent contraction of the US economy had economic repercussions across the world, which stimulated the “global financial crisis.”
The initial impact of the crash first hit America. Stock wealth in the U.S fell by $7.4 trillion from July 2008 to March 2009. Within 18 months, unemployment grew by 4.5% (5.5 million), as labour demand is derived from RNO. American households lost an average of $5800 in 2008 as a result of the crash and loss of income.
In terms of response, Obama initiated expansionary fiscal policy. Namely his controversial “Jobs Bill”, which included a $62 billion injection for a Pathways Back to Work Program for expanding opportunities for low-income youth and adults, in order to reduce the recessive nature of increased unemployment. The Federal Reserve were able to counteract the issue of major financial institutions collapsing with the assistance of bailouts (preventing a complete liquidity crisis), but were unable to prevent the stock market from plummeting.
From this analysis, we can begin to identify similarities between both crises in terms of their causation, effects, and response, which I will do in my next article on economics history. This will ultimately allow us to the question as to whether or not the two crises are comparable, and therefore to what extent politicians were able to learn from the past to avoid / reduce the effects of economic crashes.