The only significant policy difference between the current period of global recession and the Great Depression is monetary policy and financial market intervention. The government spending part is looking like it will be the same. The annual deficit is projected to rise from its current 2008 level of just under 3% of GDP to potentially 10% of GDP in 2009. However, this rise in the deficit is also similar to the early 1980s and 2000. (The big blip is World War II.)
The story that we can take from this is twofold. First, we just don't know how the market responds to a large recession independent of countercyclical government stimulus because we don't have any data on it.
However, the second story is more encouraging. The current Federal Reserve is led by the world expert on what caused the extreme length and severity of the Great Depression, Ben Bernanke. During this crisis, the Fed focused on not repeating two things that Bernanke found to be significant causes of the Great Depression--not injecting enough money (liquidity) into the economy and letting financial institutions (intermediaries) fail.
In five or ten years from now, we won't be able to tell whether fiscal stimulus is an effective response to a recession because we don't have any variation in the data. But we might be able to tell whether monetary and financial market intervention can shorten the severity and length of economic downturns.
However, the second story is more encouraging. The current Federal Reserve is led by the world expert on what caused the extreme length and severity of the Great Depression, Ben Bernanke. During this crisis, the Fed focused on not repeating two things that Bernanke found to be significant causes of the Great Depression--not injecting enough money (liquidity) into the economy and letting financial institutions (intermediaries) fail.
In five or ten years from now, we won't be able to tell whether fiscal stimulus is an effective response to a recession because we don't have any variation in the data. But we might be able to tell whether monetary and financial market intervention can shorten the severity and length of economic downturns.
