ASSIGNMENT-01

Name: Sheraz Ahmed Roll No: 20021554-048

Submitted To: Sir Ahsan
Global Financial Crisis of (1929 & 2008):
1-Introduction:
The 2008 financial crisis was the
worst economic disaster since the Great Depression of 1929. 1
It occurred despite the efforts of the Federal Reserve and the
U.S. Department of the Treasury. The crisis led to the Great
Recession, where housing prices dropped more than the price
plunge during the Great Depression.
Deregulation of
financial derivatives was a key underlying cause of the financial
crisis. Two laws deregulated the financial system. They allowed
banks to invest in housing-related derivatives. These
complicated financial products were so profitable they
encouraged banks to lend to ever-riskier borrowers.

The Global Financial Crisis of 2008 was the worst crisis since the
Great Depression of the 1930s. It emerged on the global of the
earth after the failure of financial giants like Lehman Brothers,
Bears Stearns, etc. The crisis was a result of a series of problems
including the subprime mortgage crisis. Economic Crisis
propagated through different channels like financial
integration, trade. Global Financial Crisis had serious
repercussions. The crisis led to liquidity problems. Poor
countries were further pushed into the poverty trap. The world's
total output decreased significantly as the real GDP growth rate
plunged to -1.9 % in 2009.
2-Reasons & Similarity:
The American economy is flourishing:
The American economy in the 1920s is a prosperous one. The
Republican president Herbert Hoover, sworn into office in 1929,
predicted that "peace would rule the world for many years" and
that "the world is at the brink of great commercial growth." Of
course, he had reason to be optimistic. Industrial production, in
particular in the automobile sector, was booming.
In recent
years, the US economy also boasted strong figures: GDP per
capita rose by 2.2% in 2007 (2.9% for the European Union), 3.4%
in 2006 (3% in the European Union), and 3.2% in 2005.
However, Olivier Pastré, professor at Paris VIII University notes that the
US economy –and therefore the world’s- had begun to slow down in the
middle of the 1920s, even before the stock market crash. Today, he
remarks, the rapid expansion of Asian economies (around 10% growth
expected in China in 2008), helps boost American and worldwide
growth.

Easy credit:
In the 1920s, the prosperous economy makes it easier to contract a
credit loan. Financial speculation attracts many would-be traders. At
the time, it is possible to pay only 10% of the value of a stock option to
acquire it and borrow the 90% remaining. That 90% is the target of
most speculations. When the clockwork stopped ticking in 1929,
courtiers turned to small shareholders asking them to pay back the 90%
loan, driving many to bankruptcy.
Oddly enough, we can find the same type of situation in today's crisis,
except that subprime credits were granted to by real estate instead of
stock options. Millions of families, in particular low-income families,
contracted mortgages whose rates weren't fixed, but variable. Financial
markets then speculated on these mortgages. 1929-2008: Similar
market and banking panic:

In both cases, the epicenter of the crisis was the New York stock market
(as opposed, for example, to the 1997 crisis, which began in developing
countries and South America.)
Markets have experienced similar losses in both crises. According to
Robert Parker, vice president of Credit Suisse Asset Management, the
market fell as fast in 2008 as in 1929, if not faster. "At the time,
markets lost 489% in fourteen months. Today, we have lost 45% in one
month" he says.
After Black Thursday, October 24, 1929, several smaller scares hit
markets from 1930 to 1933. Nine thousand banks, that is 15% of the
deposits in the banking system, disappeared in three years. (Source,
Economica 2001, Financial Crisis)
Since the summer of 2007, banks once again find themselves at the
forefront of the crisis: Fannie Mae and Freddie Mac, Lehman Brothers,
Northern Rock… In the United States, in Asia, and Europe, governments
have multiplied announces for partial and total nationalization of
previously powerful banks.
1929-2008: different political solutions:

It will be more interesting to compare both post-crisis periods.

One question keeps nagging economic leaders: have the lessons
of 1929 been learned.
Yes, one could say, judging from the spur of activity from
federal reserves, central banks, and governments: both the
Paulson plan and the measures unveiled by France, the United
Kingdom, and Germany on October 13 are to inject billions into
the economy to boost the flow of liquid assets. For the past
year, the Fed has deliberately maintained certain liquidity in
financial markets, by keeping interest rates low. That strategy
was adopted by most Asian and European central banks, which
lowered their benchmark interest rates in early October.
In 1929, on the other hand, the only bailout effort came from
New York’s Federal Reserve Bank, shortly after October’s
market crash. This allowed financial markets to rebound
temporarily, but with little confidence and optimism from
investors, the market low lasted nearly three years, and cash
became scarce. Meanwhile, banks’ interest rates remained
high, and credit possibilities dwindled. Government inaction in
the face of the crisis was largely blamed on US president
Herbert Hoover, paving the way for Franklin D. Roosevelt’s
election in 1932. Federal Reserve Chairman Ben Bernanke notes
in his “Essays on the Great Depression” (published in 2000) that
the countries that abandoned the gold standard and enhanced
money supplies emerged from the crisis sooner than those that
didn’t.
Another difference: the current global economy is much more
open than in the 1930s. At the time, governments favored
protectionist policies, believing they could boost the economy
from the inside. Worldwide trade had declined. Today, we seem
to have avoided that type of scenario, notable thanks to the
industrial and consumerist boom in emerging countries like
China, India, and Brazil.
Asset Prices:
Before the onset of the Global Financial Crisis,
housing prices increased drastically in the United States. An
increase in housing prices was also seen in other developed
countries like UK and Ireland.

Credit Booms:
Credit Booms were also the result of different
crises which took place before the Economic Crisis of 2008.
Longer duration and relatively large sizes of Credit Booms result
in economic crises soon. Credit Booms accompanied by
increased leverage of borrowers fuel such financial crises.
financial turmoil. Regulatory agencies
Failure of Regulatory Agencies: The crisis reveals that
regulatory agencies were unable to predict showed lack of
interest. Agencies responsible for oversight underestimated the
crisis.
3- Affect on Pakistan:
Pakistan also did not escape from the financial crisis.
Pakistan was suffering from acute macro-economic imbalances
before the onset of the Global Financial Crisis. Economic Crisis
hit Pakistan in a variety of ways. Pakistan's GDP growth rate
came down. Pakistan also witnessed a high fiscal and current-
account deficit. Inflation which was an international problem
also affected Pakistan. Pakistan's macroeconomic indicators
showed very poor performance as the GDP growth rate
declined from 6.8 % in 2007 to 4.1 % in 2008. Fiscal and Current
Account Deficit reached to the highest 7.4 % and 8.4 of GDP
respectively.

Global Financial Crisis hampered Pakistan's economic growth to

a great extent. Deteriorating foreign exchange reserves position
due to the Balance of Payment crisis compelled the Government
of Pakistan to approach IMF for a bail-out package. Foreign
Direct Investment (FDI) carries considerable importance in
economic growth and as a result of the Global Financial Crisis.
FDI came down from $5410 million in 2008 to $3720 million in
2009. Global Financial Crisis has also widened the Trade Gap in
Pakistan as Trade Deficit rose to 12.8 % of GDP in 2008.
Unfortunately, Pakistan was suffering from different problems
and thus the government was not in a condition to provide a
bail-out package. The Pakistani government had adopted a
tight monetary policy to curb the rising inflation and similarly, it
also went for an expansionary fiscal policy as there is no room
for countercyclical fiscal policy.

Pakistan faces a major challenge of achieving macroeconomic

stability and putting the economy back on track. Fiscal and
Monetary Policy carries relative importance and thus there is a
need to study the effectiveness of both the Fiscal and Monetary
Policy in the stabilization of the Global Financial Crisis.

Global Financial Crisis has brought attention to many issues.

The crisis has revealed that there is a need for reformation.
International Monetary Fund needs reformation. Similarly,
there is a lot of betterment required in the financial system of
the World.
 4- Differences & Comparison:

It is often said that the initial months of the

2008-09 crash set the US economy on a trajectory of collapse
eerily similar to that of 1929-30. Job losses were occurring at a
rate of 1 million a month on average from October 2008
through March 2009. One might therefore think that
mainstream economists would look closely at the two time
periods—i.e. 1929-30 and 2008-09—to determine with patterns
or similar causes were occurring. Or to a deep analysis of the
periods immediately preceding 1929 and 2008 to see what
similarities prevailed. But they haven’t.
What we got post-2009 from the economic establishment was
a declaration simply that the 2008-09 crash was a 'great
recession, and not a 'normal' recession as had been occurring
from 1947 to 2007 in the US. But they provide no clarification
quantitatively or qualitatively as to what distinguished a 'great'
from 'normal' recession was provided. Paul Krugman coined the
term, ‘great’, but then failed to explain how great was different
than normal. It was somehow just worse than a normal
recession and not as bad as a bonafide depression. But that’s
just economic analysis by adverbs.
It would be important to provide a better, more detailed
explanation of 1929 vs. 2008, since the 1929-30 crash
eventually led to a bona fide great depression as the US
economy continued to descend further and deeper from
October 1929 through the summer of 1933, driven by a series of
four banking crashes from late 1930 through spring 1933 after
the initial stock market crash of October 1929. In contrast, the
2008-09 financial crash leveled off after mid-2009.
Another similarity between 1929 and 2008 was the US economy
stagnated 1933-34—neither robustly recovering nor collapsing
further—and the US economy stagnated as well 2009-12. Upon
assuming office in March 1933 President Roosevelt introduced a
pro-business recovery program, 1933-34, focused on raising
business prices, plus initiated a massive bank bailout. That
bailout stopped further financial collapse but didn’t generate
much real economic recovery. Similarly, Obama bailed out the
banks (actually the Federal Reserve did) in 2009 but his
recovery program of 2009-10, much like Roosevelt’s 1933-34,
didn’t generate real economic recovery much as well.
After the failed business-focused recoveries, the differences
between Roosevelt and Obama begin to show. Roosevelt during
the 1934 midterm elections shifted policies to promising, then
introducing, the New Deal programs. The economy thereafter
sharply recovered 1935-37. In contrast, Obama stayed the
course and doubled down on his business-focused recovery
program in 2010. He provided $800 billion more business tax
cuts, paid for by $1 trillion in austerity programs for the rest of
us in August 2011.
Not surprisingly, unlike Roosevelt's 'New Deal', which boosted
the economy significantly starting in 1935 after the midterms,
Obama’s ‘Phony Deal’ recovery of 2009-11 resulted in the US
real economy continuing to stagnate after 2009.
The historical comparisons suggest that both the great
depression of 1929-33 (a phase of continuous collapse) and the
so-called 'great' recession of 2008-09 share interesting
similarities. Both the initial period of the 1930s depression—
October 1929 through fall of 1930—and the roughly nine-
month period of October September 2008 through May 2009
appear very similar: A financial crash led in both cases to a
dramatic follow on the collapse of the real economy and
employment.
But the 1929 event continues, deepening for another four years,
while the latter post-2009 event levels off in terms of economic
decline. Thereafter, similar pro-business subsidy policies (1933-
34) and (2009-11) lead to a similar period of stagnation.
Obama continues the pro-business policies and stagnation,
while Roosevelt breaks from the business policies and focuses
on the New Deal to restore jobs, wages, and family incomes
and recovery accelerates. Unlike Roosevelt who stimulates
fiscal spending targeting household incomes, Obama focuses on
further business tax-cutting—i.e. another $1.7 trillion ($800
billion December 2010 plus another $900 billion in extending
George W. Bush's tax cuts for another two years—thereafter
cutting social programs by $1 trillion in August 2011 to pay for
the business tax cuts of 2010-11.