Global Financial Crisis Australia

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Category: Business and Industry

Date Submitted: 06/08/2010 02:42 PM

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“ In a strange territory, almost any map will do, no matter how incomplete or out of date. In trying to pick a way through today’s financial crisis, there are plenty to pore over…By far the scariest is that sketched in the years beginning in 1929.” (‘1929 and all that’, The Economist, October 4 2008, page 79). What are the main aspects of the Great Depression of the late 1920s and early 1930s? What do you think are the main lessons from the Great Depression for evaluating how economic activity in countries around the world will be affected by today’s financial crisis? The Great Depression of the 1930s is known as the greatest financial catastrophes in history. It seems that in evaluating today’s Global Financial Crisis, there is still much to learnt and remembered from the 1930s. Mistakes have been repeated and the response is just how President Obama stated, that it will be, ‘Still fighting the last war’ (Sanger, 2009). Many observers have noted the parallels between the Great Recession of today and the Great Depression of the 1930s and fear a return of the protectionism seen in the earlier crisis that perhaps, ‘History doesn’t repeat itself, but rhymes’. Many lessons have been learnt: protectionism must be not be implemented, importance of exchange-rate devaluation, international coordination, and to provide financial stability. However, there are different environmental circumstances for today’s global economy that have evolved since the 1930s that require different policy responses. It is a significant observation that for both crises, it was initiated in the US through its own domestic activity through the stock market and housing market. According to Romer (1993), banks undertook heavy borrowing in 1928 because the boom on the stock market led to enough of an increase in the demand for loans that banks found it profitable to replace unborrowed reserves with borrowed reserves despite the sharply higher cost of doing so. This is an analogous trait with the...