Bernanke was heard to remark that if someone did not do something fast, by the next week there might not be an economy to rescue. If government policy makers had taken any lesson from the Great Depression, it was that tight money, high taxes, and government spending restraint could aggravate the crisis. The Treasury and the Fed seemed to compete for the honour of biggest economic booster.
So the Fed dusted off other ways of injecting money into the economy, through loans, loan guarantees, and purchases of government securities. Paulson initially intended to use the new authority to buy mortgage-based securities from the institutions that held them, thus freeing their balance sheets of toxic investments. This approach drew a torrent of criticism: How could anyone determine what the securities were worth if anything?
Why bail out the large institutions but not the homeowners who were duped into taking out punitive mortgages?
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How would the plan encourage banks to resume lending? The House of Representatives voted his plan down once before accepting a slightly revised version. The Treasury would instead invest most of the newly authorized bailout fund directly into the banks that held the toxic securities thus giving the government an ownership stake in private banks. This, Paulson and others argued, would enable the banks to resume lending. By the end of , the government owned stock in banks. Still, all that money did little, at least at first, to stimulate private bank lending.
Everyone with money to lend turned to the safest haven of all—Treasury securities. The Bush administration did little with tax and spending policy to combat the recession. Variations played out all through Europe. Credit Suisse declined an offer of government aid and, going the way of Barclays, raised funds instead from the government of Qatar and private investors.
The most spectacular troubles broke out in the far corners of Europe. In Greece street riots in December reflected, among other things, anger with economic stagnation. Iceland found itself essentially bankrupt, with Hungary and Latvia moving in the same direction. When the global crisis reached Iceland in October, the three banks collapsed under their own weight.
The national government managed to take over their domestic branches, but it could not afford their foreign ones. As in the U.
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Output in the 15 euro zone countries shrank by 0. In an atmosphere that bordered on panic, governments throughout Europe adopted policies aimed at keeping the recession short and shallow. On monetary policy , the central banks of Europe coordinated their interest-rate reductions. On fiscal policy , European governments for the most part scrambled to approve public-spending programs designed to pump money into the economy.
Most other countries followed suit, though Germany hung back as Chancellor Angela Merkel argued for fiscal restraint. Compounding the damage, exporters could not find loans in the West to finance their sales. Japan hit the skids in the second quarter of with a 3. In Europe, Audi, BMW, Daimler, GM, Peugeot, and Renault announced production cuts, but European government officials were reluctant to aid a particular industry for fear that others would soon be on their doorstep. Even in China, car sales growth turned negative.
As elsewhere, the industry held out its tin cup, but the government left it empty. The pressures of the financial crisis seemed to be forging more new alliances. Officials from Washington to Beijing coordinated interest rate cuts and fiscal stimulus packages. Top officials from China, Japan, and South Korea—longtime adversaries—met in China and promised a cooperative response to the crisis.
In the final four months of , the U. The unemployment rate shot up to 7. Economic output shrank by 0. It was doubtful that the worldwide economic picture would grow brighter anytime soon. Forecast after forecast showed lethargic global economic growth for at least It forecast an increase in global economic output of just 0. Measured by its impact on global economic output, the recession that had engulfed the world by the end of figured to be sharper than any other since the Great Depression.
The two periods of hard times had little else in common, however; the Depression started in the manufacturing sector, while the current crisis had its origins in the financial sector. Perhaps a more apt comparison could be found in the Panic of Then, as in , a real estate boom in Paris, Berlin, and Vienna, rather than in the U.
The ensuing collapse lasted four years. We welcome suggested improvements to any of our articles. You can make it easier for us to review and, hopefully, publish your contribution by keeping a few points in mind. Issue Section:. You do not currently have access to this article.
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Article activity alert. JEL classification alert. Related: Janet Yellen: Job market has not recovered. While central bankers responded to the crash timidly and even by tightening monetary policy, Bernanke's Fed knew better. Bernanke slashed rates lower than they've ever been in the U. Related: Fed chief Yellen on human toll of unemployment. Fiscal policy was also more aggressive. Economists may spend decades debating whether the Great Depression or the crisis was scarier. Few have the vantage point of Bernanke, who spent his academic career studying the former and lived through the latter.
But if anyone can make that call, it's Bernanke," said Jones. Personal Finance. The Motley Fool Paid Partner.