POL 130 Final Prompt 5: Global economic system
Dan Drezner argues that the global economic system “worked” to prevent the Great Recession from turning into another Great Depression. Explain how global responses to the stock market crash in 1929 differed from the responses after the US housing market crash in 2009. If the global economy were to suffer a similarly severe shock today, do you think the international community would respond effectively? Explain why, describing the relevant actors and institutions that you think would shape this response.
How did global responses for the 1929 stock market crash differ from the response to the 2008 crises
If there was another severe shock today, would the international community respond effectively?
Explain why, describing relevant actors and institutions that you think would shape this response
Alternative policy responses
Great Depression
Great Recession
Competitive devaluations- race to the bottom
Increased barriers to trade
Smoot Hawley Tariff
Eventually, FDR's New Deal
These policies made the GD substantially more worse than it needed to be
Domestic policy response
International policy response
Selective bailouts
Bear Stearns, Fannie Mae, Freddie Mac all saved
Lehman Brothers allowed to fail
govt didn’t want to establish a policy of bailing out banks when they do bad things- teaching the other banks a lesson, shows them that there are consequences to their actions
Stimulus package
Decreased interest rates
G20 pledges $1t to help emerging economies
Sovereign bailouts
Open markets maintained
"September and October of 2008 was the worst financial crisis in global history, including the Great Depression,"- Ben Bernanke
the reason it wasn't as bad was because of Bernanke's aggressive policy response
it was a more complex and deterioration of the financial markets
The major difference between the Wall Street crisis and the Great Depression is the way the Fed reacted.
Bernanke slashed rates lower than they've ever been in the U.S. and then pumped enough liquidity into the system
Fiscal policy was also more aggressive. Congress eventually approved the $700 billion TARP bank bailout followed by the $831 billion stimulus package in 2009.
Relavant actor: China
What is China's economy implodes?
Interest rates already near zero
Congressional Gridlock
Global commitment to openness is eroding
Uncertain whether policy response would resemble 1929 or 2009
China also has an enormous amount of debt
But it could be the next sit of a debt crisis
To get out of the recession in 2008, china used a huge stimulus package, similar to what FDR did
For now, the Chinese economy is still growing
I don't think so- I don't think it would be as bad as the Great Depression, but it will definitely be worse than the Great Recession
Why? Because we got out of the GR fairly quickly bc of an aggressive response in policy in which interest rates were slashed to nearly 0% and there were a lot of bailout and stimulus packages
If the GD showed us one thing, its that you can't waste time with this sort of this and you have to act fast and aggressively, but once interest rates have already hit near 0, where do you go.
Additionally, there is greater congressional gridlock than there was before and simply there are different people in power, there is no guarantee that thy will act similarly
Additionally, there has been a recent backlash to globalization and openness, which could affect policy making too
Also China is HUGE, if China goes under, so will the others, and the US is already in debt and may be more reluctant to bail out/ stimulus packages etc
Increased tension and backlash to globalization
People and less developed countries are bitter at institutions such as the WTO and IMF
The main difference between 1929 and 2008 is that we acted a lot quicker and more aggressively in 2008, which is why we got out quicker. I don't think we'd respond as effectively this time, but we'd still be more effective than 1929. This is because interest rates are already at 0% and the world is less open and bc of congressional gridlock, so we wont be able to act as quickly.