The massive depression was the worst economic slump that was ever experienced in the U.S. the massive depression spread to every industrialized world. This depression was first experienced in the year 1929; it then lasted for the duration of one decade. The major cause of depression was the mixture of the extensive stock market speculation that happened during the earlier part of the decade and the unequal wealth distribution, which took place in 1920s. The unequal distribution of wealth in the year 1920s was present in many levels. The available money distribution was between the rich and the middle-class, and between agriculture and industries in the United States. This relationship also existed between Europe and the United States. The existing unstable economy came about because of wealth imbalance. The stock market remained artificially high due to excessive speculation that occurred in the late 1920s. The market crashes, when combined with the unequal distribution of the available wealth, this resulted to the capsizing of the United States’ economy. In the early 1920s, the American economy flourished tremendously. The total realized income by the country rose from $74.3 billion in the year 1923 to approximately $89 billion in the year 1929.
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The chief reason for the existing gap between the working class and the rich was the added manufacturing result throughout this duration. Between 1923 and 1929, the aggregate output per every worker was elevated by 32% in manufacturing. During the same duration, the aggregate wages available for manufacturing jobs had an increment of only 8%. This resulted in to the decrease of cost of production. The prices of the products remained constant as the wages increased gradually. The corporate profit increased to 62% and the dividends increased to 65%. The federal government took part in increasing gap between middle-class and the rich. Calvin Coolidge’s administration preferred businesses; this resulted to the wealthy investing in these businesses. The legislation played at part in this by enacting revenue Act of 1926, which was signed on February 26, 1926 by President Coolidge. This Act decreases federal income as well as the inheritance taxes (Goel, 2009).
The problem with much concentration of wealth and a vast dependence upon various industries is the same as the problem with a few people having excessive wealth. If there are few people who are excessively rich just as the company, it would mean that the economy depends on this few people or company to prosper.
The financial markets difficulty in 2007 and 2008 has resulted to the most adverse financial crisis. This crisis led to a huge repercussion on the existing economy. The bursting of the housing bubble left the banks in large debts of hundred of billion dollars, which came about in the form of substandard loans from the mortgage delinquencies. It also led to capitalization of the stock markets making the main banks drop by over twice as much. Although, the aggregate losses from the mortgages might seem high on an absolute scale, this might not seem as much compared to the existing $8 trillion wealth lost in the stock market in October 2007, and the stock market attaining its highest peak in October 2008.
The economy of U.S had gone through a low interest rate surrounding, because of inflows of large capital coming from abroad, more so from Asian countries, and again, the Federal Reserve had assimilated a lax interest policy rates. The Asian countries had bought U.S securities to help in prevention of depression for their currencies against the U.S dollar, and pegging the exchange rates at a level that is exported. The Federal Reserve Banks feared existence of deflationary duration after the international bubble exploded; therefore, counteracted the development of the housing bubble. The banking system went through a vital transformation, from traditional older model to distribute and originate. This banking model pools, tranches, the loans and later utilized through securitization. The making of recent securities helped the large inflows of capital from abroad (Goel, 2009).
The existence of dual trends in the banking industry made a significant contribution regarding the lending services and the housing frenzy. This brought the foundation for the impending crisis. Rather than the bank's action of holding the loans on banks, the banks moved to a new era of originate and distribute model. The banks repackaged their loans and then passed them numerous financial investors, thus reducing the involved risk. Again, the banks had the responsibility of financing their assets holding that contained less maturity tools. This move exposed the banks to a possible dry-up in liquidity funding (Allen, 2011).
In enhancing the bank's security, the banks made up a structured product known as the collateralized debt obligations (CDOs). This called a formation of diversified mortgage portfolios and other loans, assets such as credit card receivables, and corporate bonds. The other step involved breaking down the portfolios in to varied tranches. The tranches are later sold to group of investors with varying appetites for risk.
In conclusion, the acclaimed depression was the worst economic slump that was ever experienced in the U.S. the massive depression spread to every industrialized world. This depression was first experienced in the year 1929; it then lasted for the duration of one decade. . The available money distribution was between the rich and the middle-class, and between agriculture and industries in the United States. This relationship also existed between Europe and the United States.
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