Understanding of the Great Depression

Those who cannot learn from history are doomed to repeat it. - George Santayana

History is the present. That's why every generation writes it anew. But what most people think of as history is its end product, myth. - E.L. Doctorow

History repeats itself, first as tragedy, second as farce. - Karl Marx

In order to better understand the current recession we are in and how history probably has repeated itself, I decided to devote sometime to reading up a little of the Great Depression of 1929.

Some causes of the Great Depression and the causes
1) Unequal distribution of wealth and income
2) Unequal distribution of corporate power
3) Bad banking structure (sounds familar?)
4) Foreign balance of payments
5) Lack of or poor state of economic intelligence

Some causes of the Subprime Mortgage Crisis
1) Boom and bust in US housing market
2) Speculation of housing assets and speculative loan borrowers
3) High risk mortgage loans and lending practices
4) Securitization practices
5) Inaccurate credit policies
6) Government policies (encouraging of housing for all and regulation of Freddie and Fannie)
7) Central bank policies (lowering of Fed rates)
8) Financial institution debt levels (to invest into the MBS with assumption that asset prices will continue to increase and borrowers being able to service their loans in the long term)

After reading a little more background, it was also interesting to spot a few obvious similarities of the Great Depression and the current financial tsunami we are facing right now.

Interesting commonalities
1) Origination of problem: USA
2) Common symptoms: Crashing of stock markets and bank collapses
3) Franklin D. Roosevelt used "the New Deal" to run for President ; just as how Obama is running for the current presidency using "Change" as his promise.

Some interesting differences
1) USA was a net creditor (to both the victorious Allies and defeated Central Powers) then after is used as an international reserve currency.
2) Instead of taking advice from some of his Congress to nationalize some of the failing banks (by that time, already 5000 has collapsed) Roosevelt addressed the bank runs of those days by declaring "National Bank Holiday". This meant the closing of all banks, purportedly in order to give inspectors time to review their solvency and only those in sound financial health (i.e those who passes the inspection) were allowed to reopen. In that short time span, of course, not all banks could be inspected in time. However, by taking this step, the bank reopened and the public entrusted the banks with their money once more and this actually made the bank solvent. With no cost to the government or banks, FDR managed to save the banks by restoring public confidence in the banks. In contrast, the current $700billion bailout package seemed like a costly remedy that have yet to prove that it could restore public confidence given the continued volatility in the stock market and the continued credit crunch.

An unrelated one but inspiring nonetheless

Winston Churchill: History will be kind to me for I intend to write it.



Source:
http://en.wikipedia.org/wiki/Great_depression
http://us.history.wisc.edu/hist102/lectures/lecture19.html)