People are eager to compare the current nowadays economic crisis with the 1929’s Great Depression. Though they are right in a number of issues (but don’t forget, that we are 3 seeing 3 crises interacting together, and not just a ‘bubble implosion’ in the house and stocks market, there is a huge difference in one point.
In the aftermath of the Great Depression, the political power and economic thinkers joined forces, in order to establish a system that would prevent such a huge disaster to happen again. A number of measures were the result of that thinking. And, though the World is facing a very tough moment, it is reassuring to see that this system is really working, and helping us to avoid a major falldown like the one we have seen in the 30’s.
Things like the separation of both banking systems (the investment one and the safes and loans one) is preventing this crisis to really impact on the money people have trusted their banks as deposits – of course the impact is big in terms of investments in risky assets (like structured funds, stocks,…), but the money people put aside as safe is still there for them.
But the major change is that, from the beginning, the State knew it should get a grip on the Economy. Of course there was resistance at the beginning to interfere in the economy - that is not our economic doctrinal. But, after a certain point, there was a generalized believe (and no discussions based on theory) about what should be done. And that intervention was based on the Central Bank, the economy center of all countries economies, the regulator of financial activity, with a role that was much strengthened by Keynes and others thoughts on the aftermath of 1929.
Besides the responsibility of regulating the banks and financial institutions, the Central Bank as 2 powers that are much in hand in a situation like this: act as an insurer of people’s deposits in financial institutions that go bankrupt (ensuring that, even if one’s bank is gone, is money will not entirely be jeopardized) and the ‘Lender of Last Resort’ role. This, that we have seen in action on the last few weeks in a number of occasions (namely in AIG case), means that the Central Bank of a country (this case, the US Central Reserve) will act to lend money of buy troubled institutions, preventing their bankruptcy, their default in the case of financial obligations to other institutions, and thus, stopping the bankruptcies cascade that could follow the falling down of a major institution.
The crisis is deep, and it will take years to overcome. But, thanks the lessons we have learnt from the past, it may not be as painful as before. Still, the task is huge, and from the actions that will be taken in the next few weeks, it will depend its depth and length.
http://economia.publico.clix.pt/noticia.aspx?id=1343470&idCanal=57
In the aftermath of the Great Depression, the political power and economic thinkers joined forces, in order to establish a system that would prevent such a huge disaster to happen again. A number of measures were the result of that thinking. And, though the World is facing a very tough moment, it is reassuring to see that this system is really working, and helping us to avoid a major falldown like the one we have seen in the 30’s.
Things like the separation of both banking systems (the investment one and the safes and loans one) is preventing this crisis to really impact on the money people have trusted their banks as deposits – of course the impact is big in terms of investments in risky assets (like structured funds, stocks,…), but the money people put aside as safe is still there for them.
But the major change is that, from the beginning, the State knew it should get a grip on the Economy. Of course there was resistance at the beginning to interfere in the economy - that is not our economic doctrinal. But, after a certain point, there was a generalized believe (and no discussions based on theory) about what should be done. And that intervention was based on the Central Bank, the economy center of all countries economies, the regulator of financial activity, with a role that was much strengthened by Keynes and others thoughts on the aftermath of 1929.
Besides the responsibility of regulating the banks and financial institutions, the Central Bank as 2 powers that are much in hand in a situation like this: act as an insurer of people’s deposits in financial institutions that go bankrupt (ensuring that, even if one’s bank is gone, is money will not entirely be jeopardized) and the ‘Lender of Last Resort’ role. This, that we have seen in action on the last few weeks in a number of occasions (namely in AIG case), means that the Central Bank of a country (this case, the US Central Reserve) will act to lend money of buy troubled institutions, preventing their bankruptcy, their default in the case of financial obligations to other institutions, and thus, stopping the bankruptcies cascade that could follow the falling down of a major institution.
The crisis is deep, and it will take years to overcome. But, thanks the lessons we have learnt from the past, it may not be as painful as before. Still, the task is huge, and from the actions that will be taken in the next few weeks, it will depend its depth and length.
http://economia.publico.clix.pt/noticia.aspx?id=1343470&idCanal=57
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