After analysing both crises individually, it is now important to compare their similarities in terms of causation, effects and response, and therefore conclude whether or not the crises are comparable. This will allow us to hence understand to what extent policy makers were justified in their response to 2007/8, and whether or not they actually learnt from the failures and successes of the response to the Great Depression.
The causation for both crises shares many similarities. For instance, the policy climate created in the 1920s were meant to encourage people to take out loans to fund stock investment, through maintaining low interest rates, and providing the ability to ‘Buy on the Margin’, which allowed the general public to access the overvalued blue chip stocks. This is similar to the situation in 2008. Throughout the 1990s, the Bush administration had been pushing home ownership through ‘help to buy’ schemes. The combination of this as well as cheap mortgages meant that people were easily able to gain credit to buy homes and fuel the bubble.
Both crises are also similar in terms of the overconfidence and over speculation placed in asset values. Namely, the 1920s Stock Market, and the 2000’s housing market. Both markets had been growing in value exponentially over the prior decade, and market speculation from investors suggested that the rise would not stop. Consequently, both the housing market and the stock market became overvalued, which contributed to the extent of effect for the crash.
The economics responses to the crash also share similarities. Namely, both Presidents initiated expansionary fiscal policy to boost growth. Hoover commenced the “Hoover Reconstruction Finance Corp” which allowed him to bail out the stock brokers and collapsing banks, so that they were able to provide necessary credit to cater for loans to encourage growth. This led to an increase in national debt, but an expansion in AD. Obama similarly initiated his “Jobs Bill”, which was intended to alleviate unemployment and therefore encourage consumption to kickstart short term economic growth.
Indeed, both responses were similar also in their shortcomings. Unemployment under Roosevelt rose to 21%, which lead Henry Morgentyav to argue “we are spending more than we have ever spent before, and it does not work.” This is simultaneous to Obama’s policies, which saw unemployment rise from 8%-10%, despite his stimulus packages.
What is also clear is that increasing taxation paid for both eras’ stimulus packages. To pay for Roosevelt “New Deal”, the top marginal income tax rate reached 94% for those earning over $200,000 a year, which leads to large disincentives for companies to expand, and workers to earn more. Obama similarly raised taxes, but he instead levied the taxes on demerit goods, for instance increasing taxes on cigarettes and liquor, in order to reduce over consumption, and raise necessary revenue for his Jobs Bills.
In essence, it becomes clear that both economic situations leading up to the 1929 crash and 2008 crash were similar. They were both consequences of overconfidence and speculation in an accessible market, which resulted in said market becoming overvalued, and prior investments being lost as soon as the market turned. This in turn led to the collapse of banks, a reduction in economic growth, and subsequent derived unemployment. Both era’s responses were equally similar, in their initiation of Keynesian policies to increase government intervention and boost growth through injections. However, the extent to which an economist would judge that policy makers learnt the lessons of the past depends on whether or not you believe Roosevelt and Hoover’s policies were successful. William Hazlitt criticised Roosevelt by saying that for each dollar of tax spent, it must first be raised, and increasing taxes contributes towards worsening Keynesian “animal spirits” through dis-incentivising the labour force, which can be more harmful towards economic growth.
In my judgement, 2008 policy makers did learn the lessons of the past, through their effective implementation of expansionary fiscal policy, which ultimately reduced unemployment and boosted growth. However, this is not to say that policy makers should always fall back on preconceived methods of escaping economic crises. One crash in one époque will never be a carbon copy of a previous crisis, as there will always exist some kind of individuality about every crash, either in terms of causation or effect. Hence, policy makers should not become complacent and presume that just because expansionary fiscal policy helped to resolve the 1929 crash, it will do the same in 2008. To this extent, policy makers must always develop and evolve their theories to fit with that period’s idiosyncrasies, as over-reliance on previously successful policies and falling back on the notion of “learning from history” to then apply history step by step in an incompatible era, is a sure recipe for disaster.