The Great Depression(s) of 1929-1933 and 2007-2009? Parallels, Differences and Policy Lessons

This paper provides a comparative analysis of the Great Depression (1929-1933) and the Great Financial Crisis (2007-2009) by contrasting the crises' main driving forces and how they relate to each other with respect to the United States. To this end, causes, consequences and measures undertaken during the crises are evaluated and dissected. The analysis reveals striking parallels between the Great Depression and the Great Financial Crisis. Causal factors in both crises were a flawed design of the banking system (unit banking, too-big-to-fail), a real estate boom and high debt burdens of both households and financial institutions, as well as pronounced economic inequality. Measures taken during each of the crises differed markedly, however. Whereas the political approach to the Great Depression was long characterised by inaction, the response during the recent crisis proved to be swift and aggressive, which prevented a repeat of the Great Depression by attenuating the immediate adverse effects on the economy. However, strong evidence exists that the response may only have deferred the adjustment process initiated by the crisis of 2007-2009. This paper presents empirical observations supporting the view that the structural problems which led to 2007-2009 are still existent today and continue to threaten financial stability