Great Crash and Depression: Last Economic Apocalypse: A Relook

Abstract

Unlike the economic devastation of the Second World War that was motivated primarily by the political rivalry and territorial ambitions, the economic misery of the Great Depression was not a man-made crisis. It was an institutional crisis. The Great Depression was caused by the stress from inadequacy of contemporary institutional framework to deal with the heat and exuberance of growth euphoria and attendant risks. It was a market reaction resulting from the pressure of exuberance of high which the economic and financial institutional and structure failed to cope up with. The prevalent institutional framework possessed neither the potential to assume economic aspirations of people at the height of boom nor the resiliency to guarantee protection from risks emanating from the exuberance of boom and growth fueled by the animal spirits. To a large extent, the current crisis is analogous with crisis of 1930s except that it occurred despite tremendous institutional and regulatory sophistication and safeguards created in the last more than half a century. The amount of legislation on economic and financial affairs and the degree of its refinements that had gone into no doubt created a feeling to everyone’s belief that the system possessed the fail-safe mechanism. The crisis did occur, not unwarned though, when the greed of growth and prosperity could not be tamed by the market’s assessment of risks and remained beyond contours of the prevalent regulatory framework. The sophisticated financial market products and practices had far outgrown the regulatory apparatus that could restrain it. The deployment of financial resources unleashed by such a fast growth in financial engineering and product sophistication that neither the regulatory system nor the participating banks and institutions could reckon risks was involved. The failure lied in inadequate judgment or quantitative measure of risk which enlarged like a balloon with the confluence of adverse developments. The market mechanism failed without adequate and timely warnings. Finally, it is the frenzy of animal spirits and the system’s capability to deal with it which is of crucial importance. The fact that the current crisis did not culminate bigger and larger economic calamity is due to the extent to which the system was adept in responding to it and alacrity with which the US Treasury and the Fed reacted in global coherence.