Swerdlow 1
Dylan Swerdlow
Professor Beltran
ECON 442
2 May 2023
From Crash to Crisis: A Tale of Two Economic Downturns
Introduction
The 2008 economic recession in the United States was a period of severe economic
downturn that had widespread impacts on the global economy. It was triggered by a combination
of factors, including the housing bubble, the subprime mortgage crisis, and excessive risk-taking
by financial institutions. The recession officially began in 2007 and lasted until 2009, making it
the longest and deepest economic downturn since the Great Depression of the 1930s (RBA). The
effects of the recession were felt across various sectors of the economy, leading to significant job
losses, business closures, and a sharp decline in consumer spending. The United States
government intervened with a series of measures aimed at stabilizing the financial system,
including the Troubled Asset Relief Program (TARP). In this article, we will explore the causes
and consequences of the 2008 recession in the U.S., as well as the Great Depression, and how the
two economic recessions compare to one another.
Definition of Crisis (Political & Social)
The 2008 economic recession in the United States was a complex event with a range of
political and social factors that contributed to its occurrence and consequences. Politically, some
analysts have attributed the recession to the deregulation of financial markets and lax
enforcement of laws and regulations designed to protect consumers and prevent excessive risktaking by financial institutions. In particular, the repeal of the Glass-Steagall Act in 1999, which
Swerdlow 2
separated commercial and investment banking, has been seen as a key factor in enabling banks to
engage in risky and speculative activities (FederalReserveHistory). Additionally, the role of the
government-sponsored enterprises Fannie Mae and Freddie Mac in promoting the expansion of
the subprime mortgage markets has been cited as a contributing factor (GovInfo).
Socially, the recession had a significant impact on many communities, particularly those
with already vulnerable populations. The job losses, home foreclosures, and business closures
that occurred during the recession disproportionately affected low-income and minority groups,
leading to increased economic inequality. Many of the subprime loans were issued to minority
borrowers with low credit scores and incomes, even though they qualified for prime. Therefore,
when the housing market collapsed, many minority homeowners found themselves underwater
on their mortgages or facing foreclosure. As unemployment rose, minority workers were more
likely to be employed in low-wage industries, such as construction and retail, which were hit
hard by the recession. In addition, minority communities tended to have lower levels of wealth
and fewer financial resources to fall back on during a crisis. As a result, the impact of the
recession was more severe for these communities because it was more difficult to weather the
economic downturn. The recession also had a psychological impact, with many people
experiencing high levels of stress and anxiety due to financial insecurity and uncertainty about
the future.
Core of the 2008 Financial Crisis
The core of the economic recession of 2008 was the housing bubble and the collapse of
the United States housing market that followed. This bubble was driven by a number of factors,
including low-interest rates, lax lending standards, and the use of risky financial instruments
such as mortgage-backed securities (UGA).
Swerdlow 3
Starting in the early 2000s, housing prices began to soar, fueled by a surge in demand for
homes and a loosening of lending standards made it easier for borrowers to obtain mortgages.
Lenders increasingly issued mortgages to borrowers with poor credit histories or other risk
factors, often using adjustable-rate mortgages or other risky financial instruments to do so
(UGA).
As housing prices continued to rise, investors poured money into the mortgage market,
buying up mortgage-backed securities in search of high returns. However, as the number of risky
mortgages increased, the quality of these securities began to decline. When housing prices began
to fall in 2006, many borrowers found themselves unable to make their mortgage payments,
leading to a surge in defaults and foreclosures (UGA).
Subprime Mortgage Crisis
The subprime mortgage crisis in the United States in 2008 was a housing bubble and
subsequent financial crisis that was triggered by the widespread issuance of subprime mortgages.
Subprime mortgages were home loans given to borrowers with poor credit histories, high debtto-income ratios, or other risk factors that made them unlikely to repay the loan. These loans
were often bundled into mortgage-backed securities and sold to investors, who were attracted to
the high returns offered by these investments (FederalReserveHistory).
As housing prices increased in the mid-2000s, many borrowers took out subprime
mortgages with low initial interest rates, hoping to sell their homes for a profit or refinance the
loans before the interest rates increased. However, this plan failed because “when house prices
peaked, mortgage refinancing and selling homes became [a] less viable means of settling
mortgage debt and mortgage loss rates began rising for lenders and investors"
(FederalReserveHistory). Therefore, when housing prices began to decline, many borrowers
Swerdlow 4
found themselves unable to sell their homes or refinance their mortgages, and they began to
default on their loans. This led to a wave of foreclosures, which put downward pressure on
housing prices and further increased the number of defaults (FederalReserveHistory).
The subprime mortgage crisis had significant economic consequences. As defaults and
foreclosures increased, the value of mortgage-backed securities and other financial instruments
based on subprime mortgages declined rapidly, causing significant losses for investors and
financial institutions. The crisis spread to other parts of the financial system, as banks became
reluctant to lend to one another and liquidity in the financial markets dried up. This led to a
credit crunch, which made it difficult for businesses and consumers to access credit, leading to a
decline in consumer spending and business investment (Brookings). The resulting economic
downturn, which began in 2008 and lasted for several years, had far-reaching impacts on the
global economy, leading to job losses, business closures, and a sharp decline in economic
growth.
Swerdlow 5
The graph above shows the trend in default rates on subprime mortgages in the United
States between 2001 and 2008. The data demonstrates a sharp increase in default rates beginning
in 2006, with default rates peaking at over 20% in 2008.
From an economic perspective, this graph highlights the role that default rates played on
subprime mortgages in the housing crisis and the subsequent financial crisis. The increase in
default rates on subprime mortgages in the late 2000s was driven by a number of factors,
including falling housing prices, rising interest rates, and the use of risky lending practices such
as adjustable-rate mortgages and low-documentation loans. As more and more borrowers
defaulted on their loans, the value of the mortgage-backed securities plummeted, causing
significant losses for lenders and investors (Mayer, Christopher).
Overall, the data presented in this graph highlights the importance of understanding the
role that default rates on subprime mortgages played in the housing crisis and the subsequent
financial crisis. The high default rates on subprime mortgages were a key driver of the housing
bubble and the economic collapse that followed. Understanding the causes of these default rates
is critical for preventing similar events from occurring in the future and for ensuring the stability
of the financial system.
Government Intervention for 2008 Financial Crisis
In response to the 2008 financial crisis, the United States government implemented
several measures to try to stabilize the economy and prevent a further collapse of the financial
system. Some of the key actions taken included TARP (Troubled Asset Relief Program),
stimulus packages, bailouts, and quantitative easing.
In October 2008, Congress passed the Emergency Economic Stabilization Act, which
authorized the United States Treasury to purchase troubled assets from financial institutions.
Swerdlow 6
This program, known as TARP, was created “to mend the financial situation of banks, strengthen
overall market stability, improve the prospects of the U.S. auto industry and support foreclosure
prevention programs” (History). In addition, the funds “were used to purchase equity of failing
business and financial institutions” (History).
The government also implemented several stimulus packages, including the American
Recovery and Reinvestment Act of 2009, which “consisted of $787 billion in spending (later
raised to $831 billion) in tax cuts/credits and unemployment benefits for families; it also
earmarked expenditures for healthcare, infrastructure, and education” (Investopedia). These
measures were aimed at boosting economic growth and creating jobs.
The government provided bailouts to several large financial institutions that were on the
verge of collapse including Fannie Mae and Freddie Mac, AIG, and several large banks. The
goal of these bailouts was to prevent a systemic collapse of the financial system and to ensure
that these institutions could continue to operate (Investopedia).
The Federal Reserve implemented several rounds of quantitative easing “when the fed
funds rate was cut to zero during the Great Recession [because] it became impossible to reduce
rates further to encourage lending” (Forbes). Therefore, the Fed utilized quantitative easing to
purchase mortgage-backed securities (MBS) and Treasuries to prevent the economy from
freezing (Forbes).
Overall, these measures helped to stabilize the financial system and prevent a further
collapse of the economy. While some criticized the government’s actions as a bailout of Wall
Street, supporters argued that these measures were necessary to prevent a full-blown economic
depression.
Swerdlow 7
The Great Depression
The Great Depression was a severe and prolonged economic downturn that began in the
United States in 1929 and lasted until the late 1930s. It had profound political, social, and
economic effects not just in the United States, but around the world.
The causes of the Great Depression were complex and multifaceted, but several factors
contributed to its onset. One of the main causes was the stock market crash of 1929, which led to
a massive loss of wealth and confidence among investors. Additionally, there were underlying
weaknesses in the economy, including overproduction in agriculture and manufacturing, uneven
distribution of wealth, and a weak banking system (Britannica).
Politically, the Great Depression led to significant changes in government policy and the
role of the state in the economy. President Franklin D. Roosevelt’s New Deal programs aimed to
stimulate the economy and provide relief to those who were suffering (LibraryofCongress).
Internationally, the Depression contributed to the rise of fascist and authoritarian regimes in
Europe, including Germany, Italy, and Spain. For example, the Great Depression played a
significant role in the emergence of Adolf Hitler as a political leader, given he “had an audience
for his antisemitic and anticommunist rhetoric that depicted Jews as causing the Depression
(Encyclopedia).
Economically, the Great Depression had long-lasting effects. It marked the end of the
Roaring Twenties and a shift away from the laissez-faire economic policies at the time. The
Depression also contributed to the rise of Keynesian economics, which emphasized government
intervention in the economy to stimulate growth and stabilize prices.
Socially, the Great Depression had a profound impact on people’s lives. Millions of
people lost their jobs and homes, and poverty and homelessness became widespread. The
Swerdlow 8
Depression had a particularly devastating effect on minority groups, including African
Americans and Mexican Americans, who faced discrimination and often had few resources to
fall back on. It was said that in some Northern cities, “whites would conspire to have African
American workers fired to allow white workers access to their jobs… even jobs traditionally held
by black workers, such as household servants or janitors, were going to whites” (PressBooks).
Stock Market Crash in 1929
There were a combination of factors that had built up over several years which led to the
stock market crash of 1929. One of the main causes was the overvaluation of stocks, which had
been fueled by speculative buying and an increase in the use of credit to purchase stocks. As a
result, the stock market had become inflated, with prices far exceeding the actual value of the
companies (EconomicsHelp).
Additionally, there were underlying weaknesses in the economy, including
overproduction in agriculture and manufacturing, uneven distribution of wealth, and a weak
banking system. These factors contributed to a decline in consumer spending and business
investment, leading to a slowdown in economic growth and increased unemployment. On Black
Tuesday, October 29th, 1929, panic selling and margin calls led to a massive selloff in the stock
market, and the Dow Jones Industrial Average lost almost 12% of its value (Fool). This triggered
a chain reaction, with investors and banks facing massive losses, leading to a collapse in
confidence in the economy.
Swerdlow 9
The graph above shows the Dow Jones Industrial Average (DJIA) from 1920 to 1960,
which includes the period of the stock market crash in 1929 and the subsequent Great
Depression. The DJIA is an index of 30 large publicly traded companies in the United States, and
it is widely used as a barometer of the overall health of the stock market (Investopedia).
The graph shows that the DJIA reached its peak in September 1929, just before the stock
market crash. From there, it began a sharp decline that continued through 1930 and 1931, with
occasional brief rallies. By mid-1932, the DJIA had fallen to less than 20% of its 1929 peak,
representing a significant loss of wealth for investors.
The chart above is significant in terms of economics because it illustrates the severity and
duration of the Great Depression. The stock market crash of 1929 was one of the key events that
triggered the Great Depression, and the decline in the DJIA reflects the overall decline in the
United State’s economy during that period. The sharp drop in stock prices led to a loss of
Swerdlow 10
confidence in the financial system and a reduction in consumer and business spending, which
contributed to a decline in economic activity and widespread unemployment.
Lastly, the data also shows the slow and uneven recovery of the United State’s economy
during the 1930s. While the DJIA began to recover in 1933 and continued to rise in the following
years, it did not return to its 1929 peak until the 1950s (LiveMint). The slow pace of recovery
highlights the long-lasting effects of the Great Depression and the challenges of overcoming a
severe economic downturn.
Government Intervention for the Great Depression
The United States government implemented several policies and programs to try and
solve the Great Depression. A few examples of these policies include the New Deal programs,
banking reforms, and social security.
President Franklin D. Roosevelt’s New Deal programs aimed to create jobs and provide
relief to struggling Americans. These programs included the Civilian Conservative Corps, which
employed young men to work on environmental projects, and the Works Progress
Administration, which provided jobs to millions of unemployed Americans in fields such as
constructions and the arts (LibraryofCongress).
The government implemented a number of banking reforms in order to stabilize the
financial system and restore public confidence. For example, the Emergency Banking Act of
1933 was created in which it “allow[ed] the twelve Federal Reserve Banks to issue additional
currency on good assets and thus the banks that reopen[ed] [would] be able to meet every
legitimate call” (FederalReserveHistory). By doing so, the new legislation made serious strides
to regain public confidence in the nation’s financial system.
Swerdlow 11
In 1935, the government established the Social Security system to provide a safety net for
older Americans who were no longer able to work. The system included retirement benefits, as
well as disability and survivor benefits (SSA).
Comparison between the Great Depression & 2008 Financial Crisis
The Great Depression and the 2008 financial crisis were both significant economic events
that had far-reaching impacts on the United States and the world. Starting with the similarities
between the two, both events were triggered by a financial crisis. The Great Depression was
triggered by the stock market crash of 1929, while the 2008 financial crisis was triggered by the
collapse of the housing market and the subprime mortgage market. Both events led to high levels
of unemployment. During the Great Depression, unemployment reached as high as 25%
(FDRLibrary). During the 2008 financial crisis, the unemployment rate peaked at 10% (BLS).
Both events had significant impacts on the global economy, as well. The Great Depression led to
a worldwide economic downturn, while the 2008 financial crisis had ripple effects across the
global financial system.
The Great Depression lasted much longer than the 2008 economic recession. The Great
Depression lasted from 1929 until the late 1930s, while the 2008 financial crisis had largely
subsided by 2010. The causes of the two events were different. The Great Depression was caused
by a combination of factors, including the stock market crash, bank failures, and a decrease in
consumer spending. The 2008 financial crisis was largely caused by the collapse of the housing
market and the subprime mortgage market. In addition, the policy responses to the two events
were different. During the Great Depression, the government implemented a range of programs
and policies aimed at stimulating the economy and providing relief to those who were suffering.
During the 2008 financial crisis, the government implemented policies aimed at stabilizing the
Swerdlow 12
financial system, including the Troubled Asset Relief Program (TARP), which provided funds to
banks and other financial institutions that were in danger of collapsing.
It is also important to note how the use of monetary and fiscal policy differed between the
two economic recessions. It is said that during the Great Depression, “monetary policy was not
actively used to stabilize the economy” (SayLordot). On the other hand, fiscal policy was utilized
by the United State’s government in which “government spending increased from 3.2% of real
GDP in 1932 to 9.3% of GDP by 1936. These spending increases were financed by budget
deficits” (SayLordot). In terms of the 2008 financial crisis, the Fed applied monetary policy to
“further lower intermediate and long term interest rates with large scale asset purchases – a
process known as quantitative easing” (BLS). Emphasis on forms of fiscal policy were also
implemented during the Great Recession such as “tax cuts and increases in unemployment
insurance and food-stamp benefits” (BLS). In summary, while the Great Depression and the
2008 economic recession had some similarities, they were ultimately different in terms of causes,
duration, and policy responses.
Overall, it is safe to say that the 2008 financial crisis was not a direct result of the Great
Depression. While there may have been some contributing factors that had their roots in the
Great Depression, such as the regulation of the financial sector and the role of government in
managing economic crises, the causes of the two events were ultimately different.
Prevention for Future Economic Crisis
There are several steps the United State’s government can take to prevent an economic
crisis in the future, based on the lessons learned from the Great Depression and the 2008
financial crisis: including an increase in financial regulation, strengthen consumer protection,
Swerdlow 13
promote international cooperation, maintain stable monetary policy, invest in infrastructure and
education, and address income inequality.
One of the causes of both the Great Depression and the 2008 financial crisis was a lack of
regulation in the financial sector. The government can prevent future crises by implementing
strong regulations that require transparency and accountability from financial institutions. In
addition, consumer protection measures such as the creation of the Consumer Financial
Protection Bureau, can help prevent sketchy lending practices that contributed to the 2008
recession.
The 2008 financial crisis showed that economic crises can quickly spread across borders.
The United State’s government can work with international organizations and other governments
to coordinate responses and prevent future crises from becoming global. The Federal Reserve
can also play a role in preventing economic crises by maintaining stable monetary policy and
ensuring that interest rates are set at appropriate levels. Another method of prevention includes
investing in infrastructure and education to help stimulate economic growth and create jobs,
which can prevent future economic downturn. Lastly, addressing income inequality can help to
avoid a recession by ensuring that all members of society have access to economic opportunities
and are not overly burdened by debt.
Swerdlow 14
Works Cited
AdebowaleBabajide. The Great Recession: In What Ways Did Policymakers Succeed and
Fail? : Monthly Labor Review: U.S. Bureau of Labor Statistics. 8 Nov. 2019,
www.bls.gov/opub/mlr/2019/book-review/the-greatrecession.htm#:~:text=With%20the%20federal%20funds%20rate,zero%20for%20the%2
0foreseeable%20future. Accessed 30 Apr. 2023.
American Economic Association, et al. The Rise in Mortgage Defaults on JSTOR.
season-04 2009,
www.jstor.org/stable/pdf/27648293.pdf?refreqid=excelsior%3Adbfe1d8cd1366ce12ce27
d87e6e70ff1&ab_segments=&origin=&initiator=&acceptTC=1. Accessed 30 Apr. 2023.
Australia, Scheme=AGLSTERMS. AglsAgent; corporateName=Reserve Bank Of. “The
Global Financial Crisis | Explainer | Education.” Reserve Bank of Australia, 9 Mar. 2023,
www.rba.gov.au/education/resources/explainers/the-global-financialcrisis.html#:~:text=The%20global%20financiaThe%20recession%20officially%20began
%20in%202007%20and%20lasted%20until%202009,%20making%20it%20the%20longe
st%20and%20deepest%20economic%20downturn%20since%20the%20Great%20Depres
sion%20of%20the%201930s.%20crisis%20. Accessed 30 Apr. 2023.
Bernanke, Ben S. “Financial Panic and Credit Disruptions in the 2007-09 Crisis.”
Brookings, 13 Sept. 2018, www.brookings.edu/blog/ben-bernanke/2018/09/13/financialpanic-and-credit-disruptions-in-the-2007-09-crisis. Accessed 30 Apr. 2023.
Davis, Marc. “U.S. Government Financial Bailouts.” Investopedia, Oct. 2021,
www.investopedia.com/articles/economics/08/government-financial-bailout.asp.
Swerdlow 15
DiLallo, Matthew. “The Biggest Stock Market Crashes in History.” The Motley Fool,
Apr. 2023, www.fool.com/investing/stock-market/basics/crashes.
Duca, By John V. “Subprime Mortgage Crisis.” Federal Reserve History, 22 Nov. 2013,
www.federalreservehistory.org/essays/subprime-mortgage-crisis. Accessed 30 Apr. 2023.
Duignan, Brian. “Causes of the Great Depression.” Encyclopedia Britannica,
www.britannica.com/story/causes-of-the-great-depression. Accessed 30 Apr. 2023.
Ganti, Akhilesh. “What Is the Dow Jones Industrial Average (DJIA)?” Investopedia, Apr.
2023, www.investopedia.com/terms/d/djia.asp.
Grant, Tim. “Black Tuesday.” Pittsburgh Post-Gazette, 27 Oct. 2019,
newsinteractive.post-gazette.com/stock-market-crash-1929-pittsburgh. Accessed 30 Apr.
2023.
Great Depression. encyclopedia.ushmm.org/content/en/article/the-greatdepression#:~:text=The%20Great%20Depression%20also%20played,systems%2C%20in
cluding%20fascism%20and%20communism. Accessed 30 Apr. 2023.
“Great Depression Facts - FDR Presidential Library and Museum.” FDR Library &
Museum, www.fdrlibrary.org/great-depressionfacts#:~:text=How%20high%20was%20unemployment%20during,or%2012%2C830%2
C000%20people%20was%20unemployed. Accessed 30 Apr. 2023.
Greene, By Stephen. “Emergency Banking Act of 1933.” Federal Reserve History,
www.federalreservehistory.org/essays/emergency-banking-act-of1933#:~:text=The%20new%20law%20allows%20the,every%20part%20of%20the%20co
untry.%E2%80%9D. Accessed 30 Apr. 2023.
Swerdlow 16
Hayes, Adam. “American Recovery and Reinvestment Act (ARRA): Objectives and
FAQ.” Investopedia, June 2022, www.investopedia.com/terms/a/american-recovery-andreinvestment-act.asp.
Jackson, Anna-Louise. “Quantitative Easing Explained.” Forbes Advisor, 18 Mar. 2023,
www.forbes.com/advisor/investing/quantitative-easingqe/#:~:text=When%20the%20fed%20funds%20rate,the%20economy%20from%20freezi
ng%20up. Accessed 30 Apr. 2023.
Martin, Clyde. “Figure 2.3: Default Rates on Subprime Mortgages.” ResearchGate,
www.researchgate.net/figure/Default-Rates-on-Subprime-Mortgages_fig2_253142199.
Accessed 30 Apr. 2023.
Maues, By Julia. “Banking Act of 1933 (Glass-Steagall).” Federal Reserve History, 22
Nov. 2013, www.federalreservehistory.org/essays/glass-steagall-act. Accessed 30 Apr.
2023.
Melancon, J. Merritt. “Study Offers New Perspective on the 2008 Housing Crash.” UGA
Today, Sept. 2022, news.uga.edu/new-perspective-on-the-housing-crash.
Nyt, Mark Hulbert /. “25 Years to Bounce Back From the 1929 Crash? Try Four-and-ahalf | Mint.” Mint, 26 Apr. 2009,
www.livemint.com/Money/Oww1BVK1roWvXRUCd0VjIJ/25-years-to-bounce-backfrom-the-1929-crash-Try-fouranda.html. Accessed 30 Apr. 2023.
OpenStaxCollege. “The Depths of the Great Depression.” Pressbooks, 7 May 2014,
pressbooks-dev.oer.hawaii.edu/ushistory/chapter/the-depths-of-the-great-depression.
Accessed 30 Apr. 2023.
Swerdlow 17
Pettinger, Tejvan. “What Caused the Wall Street Crash of 1929?” Economics Help, 5 July
2017, www.economicshelp.org/blog/76/economics/wall-street-crash1929/#:~:text=The%201929%20stock%20market%20crash,the%20sustainability%20of%
20economic%20growth. Accessed 30 Apr. 2023.
Policy Interventions and the Great Depression.
saylordotorg.github.io/text_macroeconomics-theory-through-applications/s11-05-policyinterventions-and-theg.html#:~:text=In%20terms%20of%20fiscal%20policy,were%20financed%20by%20bud
get%20deficits. Accessed 30 Apr. 2023.
“President Franklin Delano Roosevelt and the New Deal | Great Depression and World
War II, 1929-1945 | U.S. History Primary Source Timeline | Classroom Materials at the
Library of Congress | Library of Congress.” The Library of Congress,
www.loc.gov/classroom-materials/united-states-history-primary-source-timeline/greatdepression-and-world-war-ii-1929-1945/franklin-delano-roosevelt-and-the-new-deal.
Accessed 30 Apr. 2023.
“The Recession of 2007-2009.” U.S. Bureau of Labor Statistics, Feb. 2012, pp. 1–18.
www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf.
THE ROLE OF FANNIE MAE AND FREDDIE MAC IN THE FINANCIAL CRISIS. 9
Dec. 2008, www.govinfo.gov/content/pkg/CHRG-110hhrg50808/html/CHRG110hhrg50808.htm. Accessed 30 Apr. 2023.
Social Security History.
www.ssa.gov/history/briefhistory3.html#:~:text=The%20Social%20Security%20Act%20
was,a%20continuing%20income%20after%20retirement. Accessed 30 Apr. 2023.
Swerdlow 18
“Troubled Asset Relief Program (TARP).” HISTORY, 3 Apr. 2020,
www.history.com/topics/21st-century/troubled-asset-relief-program. Accessed 30 Apr.
2023.