What Are The Similarities Between Great Depression And The Great Recession
Bank failures are a common occurrence outside of recessions. When we look at the bank bailout of the large companies that have taken place during numerous recessions, we wonder what happened to government regulation and the concern for the consumer. We have been depositing our savings and investments in financial institutions that have not been transparent as well as depending on government to decide regulations for us one recession after another. The purpose of financial institutions has evolved over the years, with new regulations being enacted to keep up with the changing economies and technologies. It has understandably been a challenge for regulatory agencies and the banking industry to adapt to the changing times. I will also attempt
…show more content…
to examine the difference between the bank failures of the 1930 (The Great Depression and 2008 (The Great Recession). Bank Failures of the 1930’s Through Today
Investopedia defines a bank failure as being when a federal or state regulatory agency closes a bank because it is unable to meet its obligations to depositors or investors. A year or so after the stock market crash of 1929 bankers believed the economy was getting to a point of stability then a crisis developed with the commercial banks, causing the bank failures of the 1930’s. Over 9,000 U.S. banks not belonging to the Federal Reserve continued to operate as they did before the establishment of the Federal Reserve in 1913. The Federal Reserve’s purpose was to provide the nation with a safer, more flexible and stable monetary financial system ("History of the Federal Reserve - Federal Reserve Education," 2001). Banks that were not a part of the Federal Reserve failed, making it the worst bank failure in history (Richardson, 2013). Reasons for the failures were, the way in which the banks processed their checks and the inability to gather enough reserve to disburse withdrawals to panicking consumers when the crisis happened.
Out of this tragedy came the Banking Act of 1933 also known as the Glass-Steagall Act which separated commercial banking from investment banking, and the Federal Deposit Insurance Corporation (FDIC) as a temporary agency, and later the Banking Act of 1935 establishing it as a permanent agency of the government (Richardson, 2013). The FDIC was to bring confidence to the people and stability to the banking system (FDIC, n.d.). In instances of bank failures, it is the role of the FDIC to pay insurance to the depositors up to the insurance limit which is $250,000 per depositor, per insured bank, for each ownership category and accepts the task of collecting/selling the assets of the failed bank as well as, settling claims for deposits above the insurance limit (FDIC, n.d.). The FDIC is only able to take care of these obligations when the banks are insured. An insured bank is chartered by the federal government as well as most banks chartered by the state governments and covers. There is an official FDIC sign displayed at each teller window as notification to the customer that the bank is insured (FDIC.n.d.).
The worst year in bank failures since the Federal Deposit Insurance Corporation (FDIC) had been in effect was 1989. Legislation implemented as a result of the Savings and Loans Crisis reformed both bank and thrift regulations and dramatically altered the FDIC’s operations (Savings and Loans Crisis and its Relationship to Banking, n.d.). Such Acts as the Depository Institutions Deregulation and Monetary Control Act of 1980, which phased out the interest rate ceilings on deposits granted new powers to thrift institutions and the Garn – St. Germain Depository Institution Act of 1982, expanded the FDIC’s powers to assist troubled bonds through the Network Certificate Program which provided for recapitalization of banks and thrifts that suffered from interest rate shock after deregulation. S&L’s invested in all types of investments such as fast food restaurants, casinos, junk bonds and windmill farms (Walter, 2005). Walter (2005) make a great point that fraud does not usually come to light when the economy declines and the rocks are turned over. This was the case with some of the most prestigious and what appeared to be financially set financial institutions in the business world. Bank bailouts are nothing new, the Depository Institutions Deregulation and Monetary Control Act of 1980, changed the restriction on the banks’ ability to open new branches and expand across state lines. It allowed the acquisition of large banks to merge with smaller banks as one to diversify their portfolio and offer more products. The largest bank bailout since the Great Depression occurred in 1984 with Continental Illinois National Bank and Trust (The Federal Deposit Insurance Corporation, the Savings and Loan Crisis, Financial Institutions, the History of Government Bailouts and Bank Failures in the U.S, 2011).
Deposit premiums kept rising until Congress passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) of 1989. The act purposed to restore the public’s confidence in the savings and loan industry after the Federal Savings and Loan Insurance Corporation was bankrupted (FSLIC). It abolished the FSLIC and gave the responsibility of insuring the deposits of thrift institutions in its place. If FIRREA had not been in place, Savings and Loan depositors would have lost their money. FIRREA gave $50 billion to failed banks that had closed to stop losses from going any further and changed the Savings and Loan regulations to help prevent poor investments and fraud going forward and into the future (Amadeo, n.d.).
In 1991 Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA), fortifying the FDIC’s role in protecting the consumer. The act raised the FDIC’s US line of treasury from $5 million to $30 million, revamping the FDIC’s auditing and evaluation standards of member banks and created the Truth in Savings Act (Regulation DD). This act required that institutions disclose interest on savings accounts using the annual percentage rate (APY) method and equip the consumer with the knowledge to understand the potential return on their monies as well as compare products across different banks (FDICIA Definition Investopedia, n.d.).
In a joint effort to eliminate the difference amongst banks, insurance companies and other financial institutions, the Clinton Administration along with Congress allowed financial institutions to cross over into other lines of business opening up an avenue that allowed them to flourish considerably (The Federal Deposit Insurance Corporation, the Savings and Loan Crisis, Financial Institutions, the History of Government Bailouts and Bank Failures in the U.S, 2011).
The 1990’s brought about the elimination of interstate and branch banking laws, thus opening the doors for banks to merge. As banks began to merge, the number of institutions began to decline (Sherman, 2009). Under this new regulation (while waiting for the Glass-Steagall Act to be repealed), Citicorp and Travelers initiated the largest merger in history (Sherman, 2009). This merger opened the door for other large mergers, not only in the financial industry, but other industries as well. It was the Gramm Leach-Bliley Act (GLB) that replaced the Glass-Steagall Act and opened the door for deregulation.
With deregulation came what seemed to be freedom for the financial institutions to do what they wanted. The housing market began to expand making mortgages a highly competitive area for mortgage lenders offering complex loans to low-income, high risk consumers that also carried low credit ratings sticking them with adjustable rate and interest-only mortgages where interest rates reset after a few years at a much higher rate (Sherman, 2009). Alan Greenspan the Federal Reserve Chairman kept interest rates low, while mortgage lending continued to spiral out of bounds leading the economy down a path to disaster.
In 2008 the financial markets experienced a set- back reminiscent of the Great Depression. Large banks began to fail declaring bankruptcy. Consumers began to panic going into banks withdrawing their funds the same as when the Great Depression happened. The FDIC handled the business of Indy Mac, the largest failure of an insured bank in history (Sherman, 2009). The federal government began to take a look at regulations once again to stimulate the economy and out of this crisis came a new law, The Emergency Economic Stabilization Act, a bill authorizing the Treasury to spend up to &700 billion to purchase troubled assets and inject capital back into the economy known as the Troubled Asset Relief Program (TARP) (Sherman, 2009).
The reforms that took place in the early 1930s, has brought about many of the regulations we see today.
Both the Great Depression and Great Recession have followed the same pattern or cause for what happened. I like how Edwards (2011) addresses the issue when he state that each period is distinguished by a massive run up in asset prices followed by a tremendous deflationary pressure that has sent both debt and equity markets into turmoil (down). In the Great Depression, there were more than 9,000 bank failures, indicative of half of all banks nationwide. This is in comparison to 57 bank failures in the Great Recession indicating 0.6 percent of all banks and considering that banks in the 1930s recession were mostly smaller and not …show more content…
mega-banks.
The Great Depression saw the Federal Reserve do little to ‘save’ the economy because their policy actions were restricted by a currency backed by precious metal. In the face of deflation, the 1930s Federal Reserve knew it needed to inflate the money supply by lowering reserve requirements at banks. In fact, the Federal Reserves’ board of governors did in reality reduce the reserve requirement, simply not enough to cause a sizeable impact. In the case of the Great Recession, it was easier this time around, the Federal Reserve did $2.1 trillion worth of money printing in order to save financial intermediaries that were in dire need of assistance and in order to finance fiscal efforts to rejuvenate the economy (Edwards, 2011). There are others who would say that the Depression and Recession are similar in that unemployment in the Great Depression hit 25 percent, while the unemployment rate of today hit around 10 percent. The stock markets also took a big hit in both periods, with the Dow Jones Industrial Average losing nearly 90 percent of its value during the Great Depression. During the Great Recession, however, the Dow only lost about 50 percent of its value before recovering. The Great Recession did just affect the United States; countries all over the world experienced a downturn in their economy (Edwards).
Overall, the FDIC is important to the banking industry because it assures the consumer that if a bank fails due to bad investments, they won’t lose their money as long as they’re doing business with an FDIC insured bank.
I believe that the FDIC continues to serve its purpose. I personally experienced this when Wachovia failed and was taken over by Wells Fargo. This was a takeover called purchase and assumption, the existing bank (Wells Fargo), took over the accounts of the failed bank (Wachovia). Federal law requires the FDIC to pay as soon as possible. Another example would be when a consumer purchases a car or takes out a mortgage from a bank, a statement comes in the mail one day and it’s from a totally different bank, Pritchard (n.d.), states that the FDIC will usually try to close banks down by Friday’s and get back to business on Mondays so the funds are usually available by the next business day, it all depends on the circumstance of the bank failure. A requirement of the FDIC is that a bank must meet a certain criteria to qualify for the
coverage.
To sum it all up focusing on the impact the FDIC has had in protecting the consumer’s finances in regards to the financial institution. Regrettably, governments, regulators, and other institutions simply cannot cope with this rate of evolution in an acceptable way. Banks are running too quickly for the reaction-time of governments and other governing bodies. As a result, many important issues are being missed by the institutions charged with directing our societies toward the mutual good. The globe is changing and investors both individual and institutional are starting to pay attention to the ethical implications of their money.
to examine the difference between the bank failures of the 1930 (The Great Depression and 2008 (The Great Recession). Bank Failures of the 1930’s Through Today
Investopedia defines a bank failure as being when a federal or state regulatory agency closes a bank because it is unable to meet its obligations to depositors or investors. A year or so after the stock market crash of 1929 bankers believed the economy was getting to a point of stability then a crisis developed with the commercial banks, causing the bank failures of the 1930’s. Over 9,000 U.S. banks not belonging to the Federal Reserve continued to operate as they did before the establishment of the Federal Reserve in 1913. The Federal Reserve’s purpose was to provide the nation with a safer, more flexible and stable monetary financial system ("History of the Federal Reserve - Federal Reserve Education," 2001). Banks that were not a part of the Federal Reserve failed, making it the worst bank failure in history (Richardson, 2013). Reasons for the failures were, the way in which the banks processed their checks and the inability to gather enough reserve to disburse withdrawals to panicking consumers when the crisis happened.
Out of this tragedy came the Banking Act of 1933 also known as the Glass-Steagall Act which separated commercial banking from investment banking, and the Federal Deposit Insurance Corporation (FDIC) as a temporary agency, and later the Banking Act of 1935 establishing it as a permanent agency of the government (Richardson, 2013). The FDIC was to bring confidence to the people and stability to the banking system (FDIC, n.d.). In instances of bank failures, it is the role of the FDIC to pay insurance to the depositors up to the insurance limit which is $250,000 per depositor, per insured bank, for each ownership category and accepts the task of collecting/selling the assets of the failed bank as well as, settling claims for deposits above the insurance limit (FDIC, n.d.). The FDIC is only able to take care of these obligations when the banks are insured. An insured bank is chartered by the federal government as well as most banks chartered by the state governments and covers. There is an official FDIC sign displayed at each teller window as notification to the customer that the bank is insured (FDIC.n.d.).
The worst year in bank failures since the Federal Deposit Insurance Corporation (FDIC) had been in effect was 1989. Legislation implemented as a result of the Savings and Loans Crisis reformed both bank and thrift regulations and dramatically altered the FDIC’s operations (Savings and Loans Crisis and its Relationship to Banking, n.d.). Such Acts as the Depository Institutions Deregulation and Monetary Control Act of 1980, which phased out the interest rate ceilings on deposits granted new powers to thrift institutions and the Garn – St. Germain Depository Institution Act of 1982, expanded the FDIC’s powers to assist troubled bonds through the Network Certificate Program which provided for recapitalization of banks and thrifts that suffered from interest rate shock after deregulation. S&L’s invested in all types of investments such as fast food restaurants, casinos, junk bonds and windmill farms (Walter, 2005). Walter (2005) make a great point that fraud does not usually come to light when the economy declines and the rocks are turned over. This was the case with some of the most prestigious and what appeared to be financially set financial institutions in the business world. Bank bailouts are nothing new, the Depository Institutions Deregulation and Monetary Control Act of 1980, changed the restriction on the banks’ ability to open new branches and expand across state lines. It allowed the acquisition of large banks to merge with smaller banks as one to diversify their portfolio and offer more products. The largest bank bailout since the Great Depression occurred in 1984 with Continental Illinois National Bank and Trust (The Federal Deposit Insurance Corporation, the Savings and Loan Crisis, Financial Institutions, the History of Government Bailouts and Bank Failures in the U.S, 2011).
Deposit premiums kept rising until Congress passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) of 1989. The act purposed to restore the public’s confidence in the savings and loan industry after the Federal Savings and Loan Insurance Corporation was bankrupted (FSLIC). It abolished the FSLIC and gave the responsibility of insuring the deposits of thrift institutions in its place. If FIRREA had not been in place, Savings and Loan depositors would have lost their money. FIRREA gave $50 billion to failed banks that had closed to stop losses from going any further and changed the Savings and Loan regulations to help prevent poor investments and fraud going forward and into the future (Amadeo, n.d.).
In 1991 Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA), fortifying the FDIC’s role in protecting the consumer. The act raised the FDIC’s US line of treasury from $5 million to $30 million, revamping the FDIC’s auditing and evaluation standards of member banks and created the Truth in Savings Act (Regulation DD). This act required that institutions disclose interest on savings accounts using the annual percentage rate (APY) method and equip the consumer with the knowledge to understand the potential return on their monies as well as compare products across different banks (FDICIA Definition Investopedia, n.d.).
In a joint effort to eliminate the difference amongst banks, insurance companies and other financial institutions, the Clinton Administration along with Congress allowed financial institutions to cross over into other lines of business opening up an avenue that allowed them to flourish considerably (The Federal Deposit Insurance Corporation, the Savings and Loan Crisis, Financial Institutions, the History of Government Bailouts and Bank Failures in the U.S, 2011).
The 1990’s brought about the elimination of interstate and branch banking laws, thus opening the doors for banks to merge. As banks began to merge, the number of institutions began to decline (Sherman, 2009). Under this new regulation (while waiting for the Glass-Steagall Act to be repealed), Citicorp and Travelers initiated the largest merger in history (Sherman, 2009). This merger opened the door for other large mergers, not only in the financial industry, but other industries as well. It was the Gramm Leach-Bliley Act (GLB) that replaced the Glass-Steagall Act and opened the door for deregulation.
With deregulation came what seemed to be freedom for the financial institutions to do what they wanted. The housing market began to expand making mortgages a highly competitive area for mortgage lenders offering complex loans to low-income, high risk consumers that also carried low credit ratings sticking them with adjustable rate and interest-only mortgages where interest rates reset after a few years at a much higher rate (Sherman, 2009). Alan Greenspan the Federal Reserve Chairman kept interest rates low, while mortgage lending continued to spiral out of bounds leading the economy down a path to disaster.
In 2008 the financial markets experienced a set- back reminiscent of the Great Depression. Large banks began to fail declaring bankruptcy. Consumers began to panic going into banks withdrawing their funds the same as when the Great Depression happened. The FDIC handled the business of Indy Mac, the largest failure of an insured bank in history (Sherman, 2009). The federal government began to take a look at regulations once again to stimulate the economy and out of this crisis came a new law, The Emergency Economic Stabilization Act, a bill authorizing the Treasury to spend up to &700 billion to purchase troubled assets and inject capital back into the economy known as the Troubled Asset Relief Program (TARP) (Sherman, 2009).
The reforms that took place in the early 1930s, has brought about many of the regulations we see today.
Both the Great Depression and Great Recession have followed the same pattern or cause for what happened. I like how Edwards (2011) addresses the issue when he state that each period is distinguished by a massive run up in asset prices followed by a tremendous deflationary pressure that has sent both debt and equity markets into turmoil (down). In the Great Depression, there were more than 9,000 bank failures, indicative of half of all banks nationwide. This is in comparison to 57 bank failures in the Great Recession indicating 0.6 percent of all banks and considering that banks in the 1930s recession were mostly smaller and not …show more content…
mega-banks.
The Great Depression saw the Federal Reserve do little to ‘save’ the economy because their policy actions were restricted by a currency backed by precious metal. In the face of deflation, the 1930s Federal Reserve knew it needed to inflate the money supply by lowering reserve requirements at banks. In fact, the Federal Reserves’ board of governors did in reality reduce the reserve requirement, simply not enough to cause a sizeable impact. In the case of the Great Recession, it was easier this time around, the Federal Reserve did $2.1 trillion worth of money printing in order to save financial intermediaries that were in dire need of assistance and in order to finance fiscal efforts to rejuvenate the economy (Edwards, 2011). There are others who would say that the Depression and Recession are similar in that unemployment in the Great Depression hit 25 percent, while the unemployment rate of today hit around 10 percent. The stock markets also took a big hit in both periods, with the Dow Jones Industrial Average losing nearly 90 percent of its value during the Great Depression. During the Great Recession, however, the Dow only lost about 50 percent of its value before recovering. The Great Recession did just affect the United States; countries all over the world experienced a downturn in their economy (Edwards).
Overall, the FDIC is important to the banking industry because it assures the consumer that if a bank fails due to bad investments, they won’t lose their money as long as they’re doing business with an FDIC insured bank.
I believe that the FDIC continues to serve its purpose. I personally experienced this when Wachovia failed and was taken over by Wells Fargo. This was a takeover called purchase and assumption, the existing bank (Wells Fargo), took over the accounts of the failed bank (Wachovia). Federal law requires the FDIC to pay as soon as possible. Another example would be when a consumer purchases a car or takes out a mortgage from a bank, a statement comes in the mail one day and it’s from a totally different bank, Pritchard (n.d.), states that the FDIC will usually try to close banks down by Friday’s and get back to business on Mondays so the funds are usually available by the next business day, it all depends on the circumstance of the bank failure. A requirement of the FDIC is that a bank must meet a certain criteria to qualify for the
coverage.
To sum it all up focusing on the impact the FDIC has had in protecting the consumer’s finances in regards to the financial institution. Regrettably, governments, regulators, and other institutions simply cannot cope with this rate of evolution in an acceptable way. Banks are running too quickly for the reaction-time of governments and other governing bodies. As a result, many important issues are being missed by the institutions charged with directing our societies toward the mutual good. The globe is changing and investors both individual and institutional are starting to pay attention to the ethical implications of their money.