I am sure all you chums out there know by now that the country is going through a very serious financial crisis, unless you have been on a long sleep like Rip Van Winkle of the fairy tales. The economists and financial analysts worth their air time have been comparing this to the Great Depression of the 1920’s. So what exactly happened during the Great Depression of the 1920’s when almost none of us were born and how does the present situation compare with that? Let me explain.  

Wikipedia says that the Great Depression of the US started in 1929 with the stock market crash followed by a decade of unemployment, poverty and low economic growth. Though the reasons for the Great Depression (let me refer to it at GD, henceforth) are not certain, it is believed that it was caused by a combination of bad loans, badly regulated markets that also resulted in financial misappropriation by banks and financial institutions. The impact of the failure in financial markets was felt in other sectors like farming, construction and manufacturing. The financial crises snowballed into a global phenomenon as other countries also felt the impact of the GD.

Check that with the current situation- bad mortgages, subprime woes, layoffs, rising levels of unemployment and skyrocketing prices. History seems to be repeating itself. The ripples of the current economic slowdown have already reached Europe and parts of Asia. So going by how things worked during the GD, does that mean the worst is yet to come for us?

Not exactly, say the financial experts. First the government and the regulators have been swift in reacting to the financial distress as compared to the GD when they were largely mute spectators. The US Federal Reserve’s $700 billion bailout package is certainly a debatable decision but what cannot be denied is that it has insulated the banking and financial system from a large depression. As for the financial security of individuals, it is taken care of with programs like Social security and unemployment benefits, which are actually the results of lessons learnt during the GD.

Another difference between then and now is that the GD was sandwiched between World War I and II leaving little time and resources for the economy to limp and hop back to normalcy. The situation is different now, though few economists point fingers at the presence of American troops in Iraq and the precious resources required to station the troops there.  

The slowdown is certainly affecting us, no doubt. The stocks that we have invested have tumbled, our bank deposits interest rates have dwindled, prices of essential goods are rising and getting a loan may be a bit more difficult in the days to come with the threat of layoff and job cuts also around. But the past lessons learnt have helped the common people and the establishments to be better prepared to handle the situation. Economies always have the boom and bust cycle. The bust has just begun and we just have to keep our fingers crossed for it to pass off soon.