Great Depression(GD) of US and Great Financial Crisis(GFC) both had can be said to be result of the crisis of financial institutions. There are some similarities and differences between the two crises. Like both started in the banking sector and gradually spread to the real sector. During both the crises many financial institutions were either wiped out or had to be bailed out. In both the crisis it appears to have started with the bursting of a bubble and banking sector fell into run. The lower zero bound on the policy rate became effective in both cases. Finally, in both cases the crisis started in the US and subsequently spread to other countries. In spite of these similarities there are some important differences between the GFC and the GD in three main areas: Background institutions at the start of each crisis, policy responses from government and central bank and economic performance during the crisis.
Banking crises basically include bank runs, which might affect single bank; financial institution panics, or which might affect many banks; and lead to systemic banking crises, in which a country faces a large number of defaults and financial institutions and corporations have to face great difficulties in repaying the contracts. A banking crisis is mainly marked by bank runs that lead to the demise of financial institutions, or by the demise of a financial institution that starts a string of similar demises. For examples bank runs can include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007.
Comparison of Financial Institution during GD and GFC
A decade after the World War I the countries began growing aggressively. Industries started producing more as a result supply increase but the normal worker didn’t have more money than before. Consumers had to take loans so that they could buy the things for which they didn’t have the money for. The economists pointed to under consumption and over-investment...
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