The Great Financial Crisis

Banking Crisis
Great Depression(GD) of US and Great Financial Crisis(GFC) both had can be said to be result of the crisis of financial institutions. There are some similarities and differences between the two crises. Like both started in the banking sector and gradually spread to the real sector. During both the crises many financial institutions were either wiped out or had to be bailed out. In both the crisis it appears to have started with the bursting of a bubble and banking sector fell into run. The lower zero bound on the policy rate became effective in both cases. Finally, in both cases the crisis started in the US and subsequently spread to other countries. In spite of these similarities there are some important differences between
Industries started producing more as a result supply increase but the normal worker didn’t have more money than before. Consumers had to take loans so that they could buy the things for which they didn’t have the money for. The economists pointed to under consumption and over-investment (causing an economic bubble), malfeasance by bankers and industrialists, and incompetence on the part of government officials. The consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending. Once the panic and deflation set in the mind, many people believed they could avoid further losses by keeping their money away from the markets. Holding money became profitable as prices dropped lower and a given amount of money bought even more goods, exacerbating the drop in
This policy caused thousands of problematic banks into default and accelerated the downfall of others which contributed to further declines in the dwindling supplies of money and of credit. The disappearance of many banks during the great depression led to the destruction of borrowers credit ratings causing serious and protracted declines in the supply of credit by banks. Bernanke (1983b) argues convincingly that this mechanism was partly responsible for the propagation and the persistence of the recession to the real sector during the GD. Whereas by contrast, the FED gradually eased monetary policy by decreasing the discount rate from 5.25% to Practically zero during first quarter of 2009. They started buying risky assets and purchased many securities to pump huge amount of liquidity in to the system which expanded the balance sheet of FED from around 800 billion $ to over 2 trillion $. But, contrary to GD there was no mass bank failure during GFC. This became possible only due to existence of deposit insurance and injection of huge fund into the system by