Economics and Finance: Before and After Crisis (Article)

Economics and Finance: Before and After Crisis (Article)

A Story by Ibrahim Hoti

This article will focus on the US.

It's a commonly shared communist theory, to believe that in a capitalist economy, there'll be a crash after every 20 years. Even though this is, in itself, a hard and fast theory, it does hold some solid backing, when you look at modern cycles in the US (in particular), and in turn the world. Now even though economic recessions are a given in every economy, there are certain trends that do lead a lot of economic recessions in a big economy. In a lot of free market economies, this is often a result of too much private spending and not enough government involvement to balance it out. Now, even though many communist theories do point towards this being part and parcel of of a free market economy, a trend does point out that recessions usually come following periods of great private sector growth. 

The most famous, and worst example of this came in 1929, when the US NYSE saw its darkest day ever and, in turn, hit the rest of the world hard, as many countries, that were still broken from the first world war, suffered from a sharp drop in financial aid, and thus their already damaged economies, get even worse. On the other hand, the US was coming to the end a of The Roaring 20s, a decade that saw the boom of private industries and the US act as a trailblazer, in a decade where manufacturing was pushed to new heights. This process was only aided by the almost complete dominance the republicans enjoyed during the 1920s. In the political scene, the party (that, ever since the 1870s, had been the party of big business) won three elections in a row, as presidents as Harding, Coolidge and Hoover, kept public spending low and kept on imposing back to back protectionist measures, so that the private sector could expand as far as possible. When the system did fall, in late 1929, the stitches of an inflated economy opened up, as an already great poverty rate sky rocketed and an underlying instability rose up to the surface. The great depression would go on to be grip the grip the world, following the crash, but out of necessity came a game changer in economics and finance. As economists were scratching their heads to try and come up with a solution, Keynes brought up the concept of Keynesian Economics, when he said, in a recession, economic output is strongly influenced by aggregate demand. This lead Keynes to say that in times of recession, increased government expenditure and public sector activity is the best solution. This theory, at the time, came as a huge contrast to what, at the time, was considered strong economic policy. Especially, in free market economies, government spending was always outdone by huge private sector investment, and the general belief was still that, in capitalism, there's an invisible hand guiding every single action of the economy. Even though this economic belief may work for a limited amount of time, thanks to the concept of a market equilibrium, in times of recession, increased government spending a much more needed.

This theory didn't take long to prove, with the great success of Franklin Delano Roosevelt, in the USA, who implemented a state of emergency and implemented the New Deal, where laws on bank borrowing were tightened, Banks were re-started (with more stringent borrowing rates), government spending increased on public projects and welfare reform was introduced. Increased Government Expenditure allowed for not only more employment (and thus less poverty), but also for greater infrastructure and better energy sources in the country. With development projects like the Hoover Dam, the world had been taught a lesson on how to deal with economic and financial crisis. Even though Roosevelt had used increased government expenditure to take America from the great depression to winning the second world war, and being the top world superpower, the US did eventually come back to extreme capitalism and minimal government expenditure. The closest the US ever came to the economic crash of the 1929, came in 1987, when on the 19th of October (or "Black Monday"), the stock exchange suffered the largest one day crash in history. On that day, the Dow lost 22.6% of its value or $500 billion dollars. This crash came after a long of strong economic growth, that also featured minimal public sector spending and quick private sector growth, as well as few price restrictions. This, less detrimental, version of the Wall Street Crash, came largely as a result of the type of capitalist policy known as "Reaganomics", that was of course implemented by the Republican candidate, for two consecutive terms, Ronald Reagan. An even less critical version of this occurred in 2008, when a mortgage crisis caused an international economic recession, in the latter part of a decade that was once again, like the 1980s, dominated by conservative leaders who, for the large part, were great supporters of free market economies, that saw rapid private growth and less government intervention.

 When you look at links between most the major economic crashes and recessions, that have had a great detrimental effect, in the US, over the past 120 years, you see a clear cause of crashes and a usually effective solution as well. 

© 2016 Ibrahim Hoti

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excellent article. 100/100

Posted 2 Years Ago

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Added on July 27, 2016
Last Updated on July 27, 2016


Ibrahim Hoti
Ibrahim Hoti

Islamabad, South Asia, Pakistan

"We are here, not because we are law-breakers; we are here in our efforts to become law-makers."- Emmeline Pankhurst. "Everything should be made as simple as possible, but not simpler."- Albert Ei.. more..