While valid, these slight similarities in market booms are not enough to state that unsupported optimism was the major cause of both the Great Depression and the Global Recession. According to A. C. Prabhakar, author of The First Global Economic Crisis in the 21st Century, “There is no similarity here to what had happened during the Great Depression of the thirties. During the great depression; the demand fell at all levels and it was just the demand side problems. The current crisis came from the financial institutions. In the advanced countries, almost all financial and monetary institutions have been bankrupted. It is the institutional crisis” (Prabhakar 1). The National Institute Economic Review carries a similar mentality, claiming that, "The main message is that while monetary policy should 'lean against the wind' when asset bubbles are developing, the crucial fault was a lack of macro prudential regulation, partly because of an institutional silo mentality" (The World Economy 66). Both of these convey the idea that there are not an excess of similarities between the Depression and the Recession; the Great Depression was a result of overproduction accompanied by a lack of demand, while the Recession was prompted by poor decisions made by the financial companies.
Economists have supported the idea that poor business decisions brought about the recession, not a false sense of optimism. Economist Alan Blinder said that, “everything fell apart after Lehman…After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time” (The Structure of Confidence and the Collapse of Lehman Brothers 2). Similarly, economists at the National Institute Economic Review claimed that, "This (defaults on subprime mortgages) would severely restrict both consumer spending and investment, and could bring about a global recession" (Global Prospects for Medium-Term 1). These economists both conveyed that recession was brought about by business failures. Chairman of the Federal Reserve and student of the Great Depression, Ben Bernanke, stated, "As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired, and their stock prices fell sharply" (Bernanke 1). This directly expresses that an unsupported optimism was not the source of economic stress; the decisions, actions, and policies of companies brought economic distress.
The sources all conclude that the original statement could not be considered the main cause of both the Great Depression and the economic Recession of 2008. While the original statement can be supported it is more reasonable to conclude that the economic crises of both the 1920’s and the 2000’s were partially due to unsupported optimism in the market but largely caused by poor economic policy and bad decisions made by businesses and corporations.
Bibliography:
A. C. Prabhakar, "The First Global Economic Crisis in the 21st Century," Political Economy Journal of India 18, no. 3-4 (2009): 1, http://www.questiaschool.com/read/1G1-216897297.
"The World Economy," National Institute Economic Review, no. 206 (2008): 66, .
"Global Prospects for Medium-Term Growth," National Institute Economic Review, no. 202 (2007), .
Ben S. Bernanke, "Current Economic and Financial Conditions: Extraordinary Times Have Required Extraordinary Measures," Business Economics 43, no. 4 (2008), .
Richard Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” Cornell University, Department of Sociology (2009), .
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olliebaby (student)
