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Introduction:

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The global economy functions based on three factors: hope, greed, and fear. During the economic boom of the 1990’s, many investors wanted to cash-in on the bull market. The Dow Jones Industrial Average saw no bottom and continued to rise. The banks saw a similar opportunity in the real-estate market. They also wanted to cash-in on the rising housing values. They began offering sub-prime mortgages to consumers that could not afford expensive houses, but could be lured into thinking that they could somehow own their dream property. As a result, banks across the country did the same, until that fateful day when the bubble would burst and put the U.S. economy in a downward spiral that saw no end in sight. The investment firms associated with the real-estate market went bankrupt and other companies followed.

In light of the recent downturn in the U.S. economy, we are no doubt facing the toughest economic crisis since the Great Depression. President Obama was elected at a similar point in time as Franklin D. Roosevelt. President Obama faces similar challenges that FDR once faced. The banking system in crisis, along with a very low consumer consumption, added to the high unemployment rate. In fact, the unemployment rate in developed countries has increased significantly between 2008 and 2009, as shown in the following chart and graph. Just like the Great Depression, the state of the economy is being felt not only in America, but also in every community of the world. Companies are filing for bankruptcy on a daily basis. At this crucial moment in history, it is fitting that we ask the question, “Can Obama repeat what FDR had done?”


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Unemployment Rate of the United States 1999-2009 (As represented, there is a rapid incline in unemployment rate since 2008
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Unemployed citizens protest aginst governement in Iceland



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  • Causes_25.png

In order to answer the question, we must compare the situations of the Great Depression and the modern economic crisis. In order to effectively compare the two, we must first have a general understanding of the causes that led to the Great Depression.

One of the causes that led to such enormous recession was the Stock Market Crash of 1929. In the 1920’s, stock prices began to increase tremendously. As the share prices increased, the number of people who borrowed money to buy the shares also increased, since people firmly believed that investing on stock markets would bring them a good deal of money. However, the Federal Reserve knew that investing borrowed money on stocks was extremely risky. In order to prevent this speculation, they raised interest rates on loans, so that less people would invest on stocks. Unfortunately, this plan brought the country a counter-effect. As the interest rates increased, people began to spend less money on buying new products, which resulted in business failure. As businesses began to fail, the value of their stocks fell to the ground, leaving all the people who invested on the stocks penniless. The day that the shares finally plunged, October 24, 1929, is remembered as Black Thursday.

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A man tries to sell his car after losing everything on the stock market
As the economy continued to worsen, another crisis occurred: The Banking Crisis. By 1930, as much as 9000 banks had gone bankrupt, causing people to lose all their savings. As people began to lose faith in the banks, they started to withdraw more money from the banks to keep them in a safer place. This mass withdrawal of money led to deeper crisis, causing more banks to close down.

Nevertheless, even before the collapse of the banks and stock markets, the global economy was already unstable. After World War I, many European countries were in chaos to pay off their enormous debts to the United States. However, it was extremely difficult for most of the countries since they had to focus on rebuilding their country which had been bombed. As many countries, such as Germany, gave up on paying back the debts, the United States became nervous, for they were also in an economic downturn. As a final solution, President Hoover declared a Hawley-Smoot Tariff Act in 1930. The goal of this act was to increase tariffs on foreign-imported products so that more people would buy American goods. However, this plan also resulted in a counter-effect, as other countries also started to demand high tariffs on American goods. This mistake put the whole trade system in a slump, leading to the Great Depression.
(Gunderson, pages 16-28)

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  • Solutions
    People are employed to build new infrastructure under the New Deal
    People are employed to build new infrastructure under the New Deal


By 1930’s, Great Depression spread all across the world, leaving millions of people to be unemployed. As people became discouraged and lost trust in the government, which was not taking any actions to revive the economy, the new U.S. president, Franklin D. Roosevelt (also known as FDR), appeared with highly-encouraging promises that he will develop new plans to reinforce and rescue the global economy. Roosevelt’s governmental programs that were built to revive and protect the global economy became known as the New Deal.

The primary goal of Roosevelt’s New Deal was to make bank improvements. In the attempt, Roosevelt passed an Emergency Banking Bill in March 6, 1933. He declared for all the banks in America to close down. While the banks were on holidays, the Department of the Treasury checked every bank and sent money to those that were in good financial shape, which helped them stay in business. Days later, qualified banks in good financial conditions reopened, while the rest were forced to stay closed until they were in better economic conditions.
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FDR passes the Glass-Steagull Act

Another plan that Roosevelt came up with was the Glass-Steagull Act. As the recession continued to worsen, people became more anxious and began to withdraw their money from the banks to keep it in a safer place. As a result of the excessive withdrawal of money, many banks began to go bankrupt and eventually close down. In order to prevent this disaster, Roosevelt established the Federal Deposit Insurance Corporation (FDIC), which ensured people that the deposits in national banks were safe and reliable. This organization prevented further bank crisis since people began to trust the banks again and stopped withdrawing money from them.

Another aspect of FDR’s New Deal was to provide people with more job opportunities. Roosevelt established Civilian Conservation Corps (CCC) and Tennessee Valley Authority (TVA) to create more jobs through building new roads, public buildings, national forests, dams, and power plants, which provided more people with electricity. The construction of such infrastructure provided more than 2 million people with jobs within ten years.

The Works Progress Administration (WPA) provided people with even more jobs. Millions of people were hired to build new schools, roads, and airports. As well, many artists were employed to make paintings, guidebook, and music. Over 8.5 million people were saved from unemployment for the next eight years of the project.

Due to such miracles that the New Deal brought to the country, Franklin D. Roosevelt continues to be admired and respected as a savior of the global economy. This is probably why many economists are advising President Obama to seek guidance from FDR’s New Deal. However, some economists state that FDR’s New Deal actually had no effect in reviving the global economy; it was World War II that raised the demands of weapons, factories, and therefore, workers. This argument is highly acceptable as proved by the following graph. We can easily note that unemployment rate significantly dropped at the start of World War II. However, we cannot say that FDR did not make any contributions in reviving the global economy. Although he could not decrease the unemployment rate, he gave millions of people hope with encouragement and support. (Gunderson, pages 30-41)
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The Modern Economic Crisis:

  • Causes


For information on how the Modern Economic Crisis was caused, watch the video below! ↓

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.






Similarities of the Great Depression and Modern Crisis:


Similarities:
Examples from the Great Depression:
Examples form Modern Economic Crisis:
1. Asset Price Crash
"Stock Market Crash of 1929"
"Crash in assets in 2000-2002"
2. Bank Failure
"9000 banks closed down in 1930"
"Many banks are going bankrupt"
3. Expanding Public Sector
"Hoover’s Reconstruction Finance Corporation"
"Treasury Secretary Hank Paulson’s $700 billion housing bailout fund"

Directly from: (Roissy, Roissy in DC) -Because this was found in a blog highly unreliable, other sources were used to reassure the information was correct. (Gunderson, pg 16) (Vembu,"It's bad, but not quite the Great Depression.")



Conclusion: So, can Obama revive the economy by seeking guidance in FDR?
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Obama's Challenges


The answer the to the uprising question amongst many economists around the world, “Can Obama turn the economy around by seeking guidance in Franklin D. Roosevelt?” is “Yes”, and in fact, he has learned a great deal from looking back in his days of the New Deal. Obama’s plans, which he recently publicized, prove those learnings. Obama’s economic plan can be categorized into five parts: replacing old energy sources with new ones, refining and constructing new roads and bridges, building technology bases in schools, improving broadband network, and implementing electronic medical records. The first part of the plan, “energy,” states that public buildings will be made more energy efficient by replacing old heating system with new light bulbs, while the second plan. These energy-efficient light sources will place people in better financial conditions by saving energy and reducing taxes and heating bills. Another plan, “Roads and Bridges” states that such new infrastructure will be built all across the country. In effect, millions of jobs will be created and government will be able to save many people from unemployment, at least for short-term. Further, the “school” plan will repair and modernize numerous schools in America. Broken schools will be rebuilt, made more energy-efficient, and new computers will be set up in the classrooms. This system, again, will provide numerous jobs, reduce energy bills, and eventually save millions from the recession. Not only that, but it will also provide the students with more advanced education. Both the "roads and bridges" and "school" plan are similar to FDR's New Deal, which also established programs to build and refine public infrastructure. These plans show that Obama had followed the footsteps of FDR, in reviving the economy. The “broadband" plan, which states that technology will be improved, will not only affect America but also the whole world in terms of research, data, and many more. Reinforced technology will bring back competitiveness to the world and get people back to work. Finally, implemented “electronic medical records” will develop the health care system by connecting all the hospitals and their data through technology network. Improved medical system will not only make medication more convenient, but also reduce the high-medication fees. This new system will help settle the economic crisis in addition to saving millions of lives. These improvements will overall decrease the unemployment rate and bring about significant improvements to the economy, therefore, stabilizing the economy, as well as our society, both short-term and long-term (Allen,"Obama unveils 21st Century New Deal"). This plan seems to satisfy the global citizens ⎯so far. However, if Obama wants to see success in the end, his long-term goals must not include too much government intervention, but at the same time, hold in place the policies that would monitor economic activities to prevent further crisis. Another hurdle for Obama is to find a way to work with both parties in Congress. Without a bipartisan support this plan is dead before it begins. Like FDR, the congressional leaders must work together to pass the key legislation in order to alleviate and stabilize the economy. Some examples of what he may do to maintain strong economy include solving health care issues, lowering taxes for low-income consumers, lowering interest rates on bank loans, and continuing to focus on infrastructure upgrades. However, the most important of all, he must restore consumer confidence, as Franklin D. Roosevelt had successfully done. He must save them from falling into the stage of fear and instability, for, as FDR once stated, “The only thing we have to fear is fear itself”. (Krugman, "Franklin Delano Obama?")

Here's a video on Obama's New "New Deal": the Economic Plan:



Watch the news comparing Obama's Recovery Plan to FDR's New Deal:

Is Obama's Recovery Act the new New Deal?




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