What Do the Two Global Crises Tell us: History as a Mirror
Abstract
History typically does repeat with similar processes. Routes to both The Great Depression in 1929 and the Subprime Crisis (the Great Recession) in 2007 are similar: central banks implemented lax monetary policy and governments adopt populist policies to expand credit, economic growth drives public and private debt to increase sharply and asset illiquidity is caused due to the financial system's borrowing short-term funding to lend long-term loans for high profits. The key factors involved in both crises will be analysed from the following dimensions prior to the two crises: interest rates, credit booms, leverage and liquidity in the banking system. Human nature is one main reason to explain these crises. The primary cause of this phenomenon is that animal spirits such as confidence cannot be entirely eliminated, with significant subsequent effects upon the economy.
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