Can Obama avert the next Great Depression?

With his economic stimulus plan, has the President-Elect found a 1930s solution to a 1930s problem?
Commercial awareness
Politics and economics

In 1929, The United States was seemingly the richest and most content it had ever been. Prosperity, production and employment were at a high during the boom period that followed the 1st World War which became known as "the Roaring Twenties". Fast forward four years to 1933 and the economy had shrunk by a devastating 33%. Unemployment figures had risen to 13 million - 25% of the total labour force. In a relatively short time the richest economy on earth had been brought to its knees with severe repercussions for the whole of the western world. The main causes of the Depression are thought to lie with an overheating of financial markets which in turn fed into the real economy where high consumer debt had created a consumer spending boom. Share prices had reached an all time high by the end of 1929, creating a stock market 'bubble' which looked increasingly under threat of bursting. When it did, during the Wall Street Crash of October 24 1929, assets fell sharply for a year though the knock-on effect for the rest of the economy took longer. The panic in the market fed through to consumers who, startled by the headlines, began withdrawing their money in droves. Banks cut off credit to borrowers and the debt which had fuelled businesses and households over the previous decade was suddenly switched off. Thousands of banks failed, taking with them businesses, and jobs across the US, Canada and Western Europe.

Sound familiar? Substitute the Roaring Twenties for the Roaring 'Noughties' and the Wall Street Crash for the Sub-Prime financial crisis and you have a very demonstrable comparison between the onset of the Great Depression and the current economic crisis. One of the most striking similarities between the Great Depression and the current economic and financial crisis is that no one saw it coming, particularly amongst the leaders themselves. Witness the US's president, Thomas Hoover's comments:

"It has been twelve months of unprecedented advance, of wonderful prosperity...this new year will be one of felicitation and hopefulness."

in likeness to the then Chancellor, Gordon Brown's prediction in March last year:

"And we will never return to the old boom and bust".

Stopping history from repeating itself

The parallels between the Wall Street Crash and the initial stages of the current global recession are stark yet it is hoped that a prolonged and desperate recession or depression in the same mould as that of the 1930s can be avoided.

Obama's recent announcement of his multi billion-Dollar stimulus package bears a direct resemblance to Roosevelt's 'New Deal' package which was introduced in 1933 and is widely credited with bringing an end to the great Depression and putting millions of jobless Americans back into work. The scheme involved the implementation of massive public works projects across the country and was the most expensive government programme in the history of The United States. It was regarded as a massive success, so much so that by 1936 the US economy had more or less returned to the level it had been at in the late 1920s. President Roosevelt was reelected three times on the back of his success in turning around the economy.

The timing of Obama's proposal couldn't be more apt. Last week, the US Government announced a net loss of 533,000 jobs in November, the largest one-month drop since 1974, bringing the level of unemployment to 6.7 per cent. The National Bureau of Economic Research said that America has been in recession for a year.

In an interview given on America's NBC radio station, Obama pledged a five-tier rescue plan to create jobs by merging traditional road-building projects, similar to the great highway building projects of the 1930s, with massive investment in new technology and eco-friendly infrastructure. As was the case in the 1930s, any move which is good for the US economy should have a positive knock-on effect for the rest of the world economy. With the Wall Street Crash famously touted as being the major contributor to the rise of Fascism in Europe, culminating in the ascent to power of Hitler and the Nazis as well as Fascist governments in Italy and Spain, the wider consequences of America's actions in dragging itself out of a severe downturn are there to be considered. Across Europe, stock markets have so far taken news of the proposed stimulus package as a positive sign for the economy. The FTSE rose by over 5% on Monday as the Nikkei (Japan) and Hang Seng (Hong Kong) rose by 5% and 9%, respectively.

It is hoped that the proposed infrastructure projects will be underway soon after Obama takes office in January as the new president looks to hit the ground running. Time is certainly of the essence as it was recently announced by economists that the US has been in recession since the end of 2007 and with indications that the health of the world economy is rapidly declining. Obama himself recently speculated that things will get worse before they start to imrpove. Following the Wall Street Crash, the US government was blamed as being too slow to react to the crisis which exacerbated the decline of the economy and prolonged the economic downturn. It let thousands of banks fail and stood by as millions of people lost their jobs and their homes. It wasn't until 1933 that Roosevelt's New Deal put a plug in the downturn, four years after the problem had begun, and, crucially, the same year in which the Nazis came to power. By acting now, Obama may just have saved us from several preventable years of misery.

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