Recession vs Depression

Depressions are generated by the same factors that cause a recession. You can look at depression as an extended recession on the graph of the business cycle wave. Unemployment rises, gross domestic product (GDP) drops off,stock prices fall and the stock market crashes.

In simple terms, depressions are really protracted versions of recessions. In February 2008, the unemployment rate in the U.S. was 4.8 percent [source: Bureau of Labor Statistics]. But it wasn't until March 2008 that economists began to seriously consider that the economy was entering a recession. By contrast, during the Great Depression unemployment grew from 3 percent before the stock market crash of 1929 to 25 percent in 1933 [source: Bernanke]. In that same period, the U. S. gross domestic product fell by nearly half, from $103.8 billion to $55.7 billion [source: National Parks Service].

While no one wants to see the country in a depression, not everyone views a recession as a bad thing. The National Bureau of Economic Research says that expansion -- the opposite of recession, represented by the upward movement of the market wave -- is the normal state of a market [source: NBER]. But some economists take more of a Zen approach, considering recession as neither bad nor good, but part of a natural market cycle. When the Federal Reserve Bank steps in to adjust interest rates, some say this actually tampers with the natural order of the economy. Even worse, some economists believe that changing interest rates to pump up a recessing market can make matters worse by extending the decline. However, few people seem to resist when the Fed adjusts markets during a recession. (Source: http://money.howstuffworks.com/recession-and-depression2.htm)

The Great Recession of 2008–09: Year In Review 2009

When 2009 dawned, no one knew whether the global financial crisis that had burst into full bloom the previous autumn would develop into the second Great Depression. Twelve months later, what many called the Great Recession showed signs of coming to an end, and the worst appeared to have been averted. On the whole, private economists applauded the U.S. government’s response to the crisis at hand, but some of the remedies enacted there and in other countries seemed poised to haunt the world economy in years to come.

Even if the financial crisis did not send the world back to the 1930s, it turned economic growth into contraction in many countries and slowed expansion practically everywhere else. The ripple effects of the financial crisis ranged far beyond the financial. Governments fell in Iceland and Latvia. The Chinese brushed aside pleas for more accommodating human rights and currency valuation policies. European political union was put under strain. Japan proposed only weak measures to combat climate change.

Most of the major industrial democracies adopted domestic government programs designed to awaken their slumbering economies; the U.S. package, at $787 billion, was the biggest. The world’s economic outlook brightened as the year proceeded, however, and most countries began growing again in mid-2009 after recessions that were, for most, the deepest since the Great Depression. In a rare exception, China escaped the slump; if anything, the global recession burnished China’s apparent ambition to challenge U.S. dominance in the global economy.

The U.S. Leads the Way

The U.S. housing market was the domino that, when it fell, toppled many of the world’s major economies and led the world into recession. For the first half of the decade, aggressive investing by homebuyers, mortgage lenders, Wall Street investment houses, and insurers had driven up the median price of a single-family home by almost 10% a year, with housing in some parts of the country escalating even faster. When home prices headed back down in 2007, large numbers of homeowners faced rising adjustable-rate mortgage payments and/or could no longer borrow against a rising home value to finance other expenses. By the middle of 2009, the median home price had fallen close to its 2000 level. Those with heavy investments in housing, including risky mortgage-backed securities, found them all but worthless. The government stepped in with a massively expensive bailout program in late 2008 and continuing into 2009.

The devastation to the U.S. economy spread far beyond housing. The banking industry was especially hard hit. (See Sidebar.) Altogether, 176 banks in the U.S. failed in 2009, many of them small and local. Even financially secure banks, not trusting potential borrowers to pay them back, stopped lending. Businesses—especially small and new businesses—could not find the credit that they needed to pay creditors or buy inventory or to pay their own workers, much less to hire new ones. Even short-term interest rates close to zero did not fully thaw credit markets. Businesses that relied on their customers’ ability to secure loans had a rough time. Automakers General Motors (GM) and Chrysler, both of which reorganized after brief trips through bankruptcy in 2009, qualified for bailout money. The overall economic slowdown sent stock prices reeling, with the benchmark Dow Jones Industrial Average (DJIA) sinking by about 54% in the 17 months from the market high in October 2007 to the trough in March 2009.

As 2009 began, comparisons with the Great Depression were as common as foreclosed houses in Nevada, but there was one important difference: policy makers this time had the experience of the Depression to guide them. They identified three policy areas where they vowed not to make the same mistakes that seemed to have prolonged the Depression: fiscal, monetary, and trade.

In the 1930s, national leaders generally pledged allegiance to fiscal policies based on balanced budgets. With tax revenue falling in tandem with economic growth, balancing budgets meant cutting spending just when economies needed to stimulate business expansion and job growth. This time around, however, political leaders poured money into such projects as road construction and schools. Although some governments were more aggressive than others, just about all countries joined the stimulus parade.

In 1929 the U.S. Federal Reserve Board (Fed), seeking to restrain a speculative rise in stock prices, instituted a monetary policy of tight money and high interest rates. The economy predictably contracted, and the Depression officially began that August. Nevertheless, the Fed further tightened its grip on the money supply in 1931, adding to the squeeze on the domestic economy. Through all of 2009, however, the Fed held the Fed Funds rate (the interest rate that banks pay each other for overnight loans) in a range of 0.0–0.25%. Most other central banks also loosened monetary policy. The Fed and many of its foreign counterparts also injected capital into banks and bought their shaky loans.

When economies go haywire, there is a natural tendency to close ranks by tightening trade policy and refraining from buying foreign goods. In 1930 the U.S. Congress enacted the Smoot-Hawley import tariffs. Many U.S. trading partners followed suit. The result was a decline in world trade volume estimated in late1932 at about 30% and still growing, an outcome almost universally seen as having fueled the Great Depression. This time there was no such rush to protect industry at home, although worldwide trade actually dropped even more sharply in the current financial crisis than during the beginning of the Depression. This was not the result of new trade barriers; rather, the faltering global economy sapped demand for goods and services, whether produced at home or abroad.

Enlightened decision making may have blocked another Depression, but it could not prevent a great deal of misery. The financial crisis struck individual countries with an impact that depended heavily on two factors: whether local institutions had ties to the U.S. financial sector and whether the local economy depended on export sales to the West. Most of the developed countries had close financial and trade relations with the U.S. Of the 33 countries that the International Monetary Fund considered to have “advanced economies,” only Australia seemed likely to avoid a period of contraction. The dynamic economies of Asia were well positioned, and three large Asian countries—India, Indonesia, and China—escaped relatively unscathed. At least in the short run, India benefited from having isolated itself from the crosscurrents of the global economy. Japan’s economy, the largest in the world after the U.S., was fused to the West’s, and Japan marched alongside the West into recession. With a large economic stimulus package in place, however, Japan pulled out of recession in the third quarter of 2009. Fearful that strict limits on greenhouse gas emissions could cripple the economic rebound, the Japanese government proposed weaker limits than those under discussion in Europe and the U.S.

Europe, with its close financial and trade ties to the U.S., stood in sharp contrast to Asia. Even Norway, which had virtuously invested its North Sea oil revenue with considerable prudence while the U.K. was spending its windfall on government programs, could not escape recession. Norway slipped into a mild slump in late 2008 and emerged early in 2009. Most of the rest of Europe fared worse. Many countries approved economic stimulus packages to extricate themselves from recession, and many resumed economic growth, although the U.K., Spain, and others remained in recession for the first nine months of 2009. In the fourth quarter, the U.K. barely emerged from recession with growth of 0.1%. Reflecting fears of future inflation, the stimulus programs in Europe were smaller than those in the U.S. Perhaps more significant, the largesse stopped at national borders. Germany, France, and other wealthy European Union countries defeated Hungary’s request that the EU’s Western European members give $240 billion to members in Eastern Europe to combat the slump.

Hardest hit were countries at the four “corners” of Europe: Iceland, Latvia, Greece, and Spain. Iceland became the first country to lose its government over the financial crisis. Iceland’s three largest banks, privatized in the early 1990s, had grown fat on securities trading, but they failed in 2008 when the financial crisis left them unable to pay a mountain of foreign obligations. The conservative prime minister resigned in January 2009 and was replaced by a leftist, Jóhanna Sigurðardóttir, who promptly recapitalized the banks and started the process of taking her fiercely reclusive country into the EU. International trade—or the sudden lack of it—was Latvia’s undoing. Latvia had boasted Europe’s strongest economic growth rate (10%) as recently as 2007. Then the tables turned, and the Latvian economy shrank at double-digit rates in 2009—possibly the worst performance in Europe, although its Baltic neighbours, Lithuania and Estonia, were not far behind. In the Latvian capital of Riga, a street demonstration in January to protest economic decline turned violent, and a month later the prime minister resigned.

In Greece, where the budget deficit reached nearly 13% of annual economic output (even greater than the 11% in the U.S.), the three credit-rating services—Fitch, Moody’s, and Standard and Poor’s—downgraded the country’s debt. At year’s end Greece had the lowest credit rating of the 16 countries in the euro zone. That made it more expensive for Greece to finance its debt, which at 130% of economic output was nearly the highest in Europe. A default on its debt would be a giant headache not only for Greece but also for the entire EU. Spain, whose budget deficit was rocketing toward 11%, was on the same path as Greece, although less far along. Standard and Poor’s also downgraded Spain, which started at a much higher level.

The fiscal problems that put Greece and Spain on a slippery slope were common across Europe, especially among economies that had grown the most (largely on borrowed money) during the heady early years of the decade. Ireland, heretofore an EU success story, was a typical case. The Irish government, determined not to let the budget deficit reach 13%, proposed to raise taxes, cut benefits, and trim government workers’ pay. The U.S. Response

In the United States, the government followed a two-pronged strategy to reverse the financial crisis: bail out distressed financial institutions (lest they transmit their failure to their creditors) and pump government money into the economy (to stimulate business activity when private loans were scarce). What emerged from the bailout was an extraordinary degree of government involvement in—and sometimes even majority ownership of—the private sector. Altogether, the government by late 2009 had provided an estimated $4 trillion to keep the financial sector afloat. Many of the biggest bailout beneficiaries quickly paid the government back, and the ultimate cost of the bailout to taxpayers was estimated at “only” $1.2 trillion. Congress in February handed Pres. Barack Obama the first legislative triumph of his month-old presidency when it enacted a $787 billion fiscal stimulus bill that comprised $288 billion in tax cuts and $499 billion in spending, most of it for public-works programs such as school construction and highway repair. Although Republicans groused that checks for much of the $499 billion would be issued too late to do any good, the nonpartisan Congressional Budget Office said that thanks to the tax measures, about three-quarters of the full $787 billion would be spent in 18 months. Obama claimed that the bill would create or preserve 3.5 million jobs, a figure that many of his opponents called far too optimistic.

Congress also played a role in the bailout of failing financial institutions. At the end of 2008, Congress enacted the Troubled Asset Relief Program (TARP) authorizing the Department of the Treasury to invest up to $700 billion by buying unproductive real-estate investments or even becoming part owners by purchasing financial company stock. The Fed, using authority that it already had, played an even bigger role. Printing more money when not enough was available, the central bank invested heavily in foundering institutions and guaranteed the value of their shaky assets. By the end of 2009, the government owned almost 80% of American International Group (AIG), the country’s biggest insurer, at a cost of more than $150 billion. It also owned 60% of GM and had a stake in some 700 banks. It initially spent $111 billion to prop up Fannie Mae and Freddie Mac, the companies sponsored by Congress to buy mortgages from their issuers. The government promised to play no role in managing these companies and to sell its ownership stakes as soon as practical. TARP provided the Treasury with only a fraction of the funds used for the bailout, however. The Fed was responsible for the lion’s share, and even the massive AIG rescue was engineered entirely outside the legislated Treasury Department program.

Reflecting public views, members of the government expressed outrage that some of the same executives who helped precipitate the financial crisis should make millions of dollars a year in salaries and bonuses. Treasury Secretary Timothy Geithner appointed a “special master for executive compensation” to review the compensation packages of top financial executives at firms that received bailouts. Many of the biggest bailout beneficiaries balked at the proposed salary limits and strove to get out from under them by paying the government back.

More ominously for the financial institutions, many members of Congress marched into 2010 with a determination to regulate them more closely. The House passed a bill in 2009 that for the first time would bring exotic financial instruments under review by federal regulators. The bill would also establish a single agency to protect financial consumers and guarantee shareholders a chance to vote on the compensation packages of corporate executives. The Senate planned to take up the issue in 2010.

An Uncertain Future

Despite the year-end sighs of relief over the improving economy, the economic destruction had not necessarily run its course. Many banks that survived the crisis were badly bruised by the collapse of the housing market and remained less willing than before to provide the credit that greases all capitalist economies. Huge government budget deficits, designed to facilitate economic growth in the short term, loomed like dark clouds on the horizon, threatening inflation and currency devaluations. Low interest rates encouraged immediate business activity, but, like budget deficits, they could ultimately feed inflation. International trade, which suffered as countries hunkered down and adopted “me-first” policies, held below precrisis levels. In the U.S., foreclosure rates were high and rising. Nearly one house in four was worth less than what the occupants owed on the mortgage, and similar problems in commercial real estate were mounting.

Despite this, harbingers of prosperity were not hard to find. Stock markets turned robustly upward, with the DJIA making up half of its losses by year-end 2009. Although unemployment in the U.S. reached a peak of 10.2%, its highest level since 1983, it declined to 10%, and the 2.2% annual growth rate that the economy registered in the third quarter suggested future job growth. Economists even took heart from the plight of Dubai World, a government-owned developer in Dubai, U.A.E., that could not pay back $3.5 billion in loans by a December 14 deadline. Just in the nick of time, fellow emirate Abu Dhabi bailed out Dubai with $10 billion. Not only was that enough to get Dubai World well beyond its immediate default date, but it also proved that not every financial cough would mean pneumonia for the global economy. (Source: http://www.britannica.com/EBchecked/topic/1661642/The-Great-Recession-of-2008-09-Year-In-Review-2009/286636/The-US-Response)

The Great Depression

The next step in a mounting spiral of international crisis came with theonset of a global economic depression, which hit the headlines with the crash of key Western banks in 1929 but which in fact had begun, sullenly, in many parts of the world economy even earlier.

    

The depression resulted from new problems in the industrial economy of Europe and the United States, combined with the long-term weakness in economies, like those of Latin America, that depended on sales of cheap exports in the international market. The result was a worldwide collapse that spared only a few economies and brought political and economic pressures on virtually every society.

Causation

The impact of the First World War on the European economy had led to several rocky years into the early 1920s. War-induced inflation was a particular problem in Germany, as prices soared daily and ordinary purchases required huge quantities of currency. Forceful government action finally resolved this crisis in 1923, but only by a massive devaluation of the mark, which did nothing to restore lost savings. More generally, a sharp, brief recession in 1920 and 1921 had reflected other postwar dislocations, though by 1923 production levels had regained or surpassed prewar levels. Great Britain, an industrial pioneer that was already victim of a loss of dynamism before the war, recovered more slowly, in part because of its unusually great dependence on an export market now open to wider competition.

Structural problems affected other areas of Europe besides Britain and lasted well beyond the predictable readjustments to peacetime. Farmers throughout much of the Western world including the United States faced almost chronic overproduction of food and resulting low prices. Food production had soared in response to wartime needs, and then during postwar inflation many farmers, both in western Europe and in North America, borrowed heavily to buy new equipment, overconfident that their good markets would be sustained. But rising European production combined with large imports from the Americas sent prices down, which made debts harder to repay. One response was continued flight from the countryside, as urbanization continued. Remaining farmers were hard-pressed and unable to sustain high demand for manufactured goods.

Thus, although economies in nations such as France and Germany seemed to have recovered by 1925, there were continued problems: the fears inflation had generated, which in turn limited the capacity of governments to respond to other problems, plus the weaknesses in the buying power of key groups. In this situation, part of the mid- decade prosperity rested on exceedingly fragile grounds. Loans from United States banks to various European enterprises helped sustain demand for goods, but on condition that additional loans pour in to help pay off the resultant debts.

Furthermore, most of the dependent areas in the world economy, colonies and noncolonies alike, were suffering badly. Pronounced tendencies toward overproduction developed in the smaller nations of eastern Europe, which sent agricultural goods to western Europe, as well as among tropical producers in Africa and Latin America. Here, continued efforts to win export revenue drove local estate owners to drive up output in such goods as coffee, sugar, and rubber. As European governments and businessmen organized their African colonies for more profitable exploitation, they set up large estates devoted to goods of this type. Again, production frequently exceeded demand, which drove prices and earnings down not only in Africa but also in Latin America. This meant in turn that many colonies and dependent economies were unable to buy many industrial exports, which weakened demand for Western products precisely when output tended to rise amid growing United States and Japanese competition.

Governments of the leading industrial nations provided scant leadership during the emerging crisis of the 1920s. Knowledge of economics was often feeble amid a Western leadership group not noteworthy for its quality even in more conventional areas. Nationalistic selfishness predominated. Western nations were more concerned about insisting on repayment of any debts owed to them or about constructing tariff barriers to protect their own industries than in facilitating balanced world economic growth. Protectionism, in particular, as practiced even by traditionally free-trade Great Britain and by the many new nations in eastern Europe, simply reduced market opportunities and made a bad situation worse. By the later 1920s employment in key export industrial sectors in the West - coal (also beset by new competition from imported oil), iron, and textiles - began to decline, the foretaste of more general collapse.

The Debacle

The formal advent of depression occurred in October 1929, when the New York stock market crashed. Stock values tumbled, as investors quickly lost confidence in issues that had been pushed ridiculously high. United States banks, which had depended heavily on their stock investments, rapidly echoed the financial crisis, and many institutions failed, dragging their depositors along with them. Even before this collapse, Americans had begun to call back earlier loans to Europe. Yet the European credit structure depended extensively on American loans, which had fueled some industrial expansion but also less productive investments such as German reparation payments and the construction of fancy town halls and other amenities. In Europe, as in the United States, many commercial enterprises existed on the basis not of real production power but of continued speculation. When one piece of the speculative spiral was withdrawn, the whole edifice quickly collapsed. Key bank failures in Austria and Germany followed the American crisis. Throughout most of the industrial West, investment funds dried up as creditors went bankrupt or tried to pull in their horns.

With investment receding, industrial production quickly began to fall, beginning in the industries that produced capital goods and extending quickly to consumer products fields. Falling production - levels dropped by as much as one-third by 1932 - meant falling employment and lower wages, which in turn withdrew still more demand from the economy and led to further hardship. The existing weakness of some markets, such as the farm sector or the nonindustrial world, was exacerbated as demand for foods and minerals plummeted. New and appalling problems developed among workers - now out of jobs or suffering from reduced hours and reduced pay - as well as the middle classes. The depression, in sum, fed on itself, growing steadily worse from 1929 to 1933. Even countries initially less hard hit, such as France and Italy, saw themselves drawn into the vortex by 1931.

In itself, the Great Depression was not entirely unprecedented. Previous periods had seen slumps triggered by bank failures and overspeculation, yielding several years of falling production, unemployment, and real hardship. But the intensity of the Great Depression had no precedent in the brief history of industrial societies. Its duration was also unprecedented; in many countries full recovery came only after a decade, and only with the forced production schedules provoked by World War II. The depression was also more marked than its antecedents because it came on the heels of so much other distress - the economic hardships of war, for example, and the catastrophic inflation of the 1920s - and because it caught most governments utterly unprepared to cope.

The depression was more, of course, than an economic event. It reached into countless lives, creating hardship and tension that would be recalled even as the crisis itself eased. Loss of earnings, loss of work, or simply fears that loss would come could devastate people at all social levels. The suicides of ruined investors in New York were paralleled by the vagrants' camps and begging that spread among displaced workers. The statistics were grim: up to one-third of all blue-collar workers in the West lost their jobs for prolonged periods. White-collar unemployment, though not quite as severe, was also unparalleled. In Germany 600,000 of four million white-collar workers had lost their jobs by 1931. Graduating students could not find work or had to resort to jobs they regarded as insecure or demeaning. Figures of six million overall unemployed in Germany and 22 percent of the labor force unemployed in Britain were statistics of stark misery and despair. Families were disrupted, as men felt emasculated at their inability to provide and women and children were disgusted at authority figures whose authority was now hollow. In some cases wives and mothers found it easier to gain jobs in a low-wage economy than their husbands did, and although this development had some promise in terms of new opportunities for women, it could also be confusing for standard family roles. Again, the agony and personal disruption of the depression constituted no short shock. For many it was desperately prolonged, with renewed recession around 1937 and with unemployment still averaging ten percent or more in many countries by 1939.

Just as World War I had been, the depression was an event that blatantly contradicted the optimistic assumptions of the later 19th century. To many, it showed the fragility of any idea of progress, any belief that Western civilization was becoming more humane. To still more it challenged the notion that standard Western governments - the parliamentary democracies - were able to control their own destinies. And because it was a second catastrophic event within a generation, the depression led to even more extreme results than the war itself had done - more bizarre experiments, more paralysis in the face of deepening despair.

Worldwide Impact

Just as the depression had been caused by a combination of specifically Western problems and wider weaknesses in the world economy, so its effects had both Western twists and international repercussions.

A few economies were buffered from the depression. The Soviet Union, busy building an industrial society under communist control, had cut off all but the most insignificant economic ties with other nations under the heading "socialism in one country." The result placed great hardships on many Russian people, called to sustain rapid industrial development without outside capital, but it did prevent anything like a depression during the 1930s. Soviet leaders pointed with pride to the lack of serious unemployment and steadily rising production rates, in a telling contrast with the miseries of Western capitalism at the time.

For most of the rest of the world, however, the depression worsened an already bleak economic picture. Western markets could absorb fewer commodity imports as production fell and incomes dwindled. Hence the nations that produced foods and raw materials saw prices and earnings drop even more than before. Unemployment rose rapidly in the export sectors of the Latin American economy, creating a major political challenge not unlike that faced by the Western leaders.

Japan, as a new industrial country still heavily dependent on export earnings for financing its imports of essential fuel and raw materials, was hit hard too. The Japanese silk industry, an export staple, was already suffering from the advent of artificial silk-like fibers produced by Western chemical giants. Now luxury purchases collapsed, leading to severe unemployment and, again, a crucial political crisis.

Between 1929 and 1931, the value of Japanese exports plummeted by 50 percent. Workers' real income dropped by almost one-third, and there were over three million unemployed. Depression was compounded by bad harvests in several regions, leading to rural begging and near-starvation.

The Great Depression, though most familiar in its Western dimensions, was a truly international collapse, a sign of the tight bonds and serious imbalances that had developed in world trading patterns. The results of the collapse, and particularly the varied responses to it, are best traced in individual cases. For Latin America, the depression marked a pronounced stimulus to new kinds of effective political action, and particularly greater state involvement in planning and direction. New government vigor did not cure the economic effects of the depression, which escaped the control of most individual states, but it did set an important new phase in the civilization's political evolution. For Japan, the depression increased suspicions of the West and helped promote new expansionism designed among other things to win more assured markets in Asia. In the West the depression led to new welfare programs that stimulated demand and helped restore confidence, but it also led to radical social and political experiments such as German Nazism. What was common in this welter of reactions was the intractable global quality of the depression itself, which made it impossible for any purely national policy to restore full prosperity. Even Nazi Germany, which boasted of regaining full employment, continued to suffer from low wages and other dislocations aside from its obvious and growing dependence on military production.

The reactions to the depression, including a sense of weakness and confusion in many quarters inside and outside policy circles, finally helped to bring the final great crisis of the first half of the 20th century: a second, and more fully international, world war. (Source: http://history-world.org/great_depression.htm)

Sources: 

http://www.britannica.com/EBchecked/topic/1661642/The-Great-Recession-of-2008-09-Year-In-Review-2009/286636/The-US-Response

Adas, Michael. One-Half Century Of Crisis, 1914-1945. 1992 http://history-world.org/great_depression.htm

Clark, Josh. http://money.howstuffworks.com/recession-and-depression2.htm