The Subprime Crisis: The Sister Crisis And The Great Depression

Although there has not been a consensus on an exact causation —due to its global nature—there has been unanimity on a number of factors. As in the case of its sister crisis (the Great Depression), many scholars acknowledge that before this cataclysm struck, the preceding economy did in fact experience a “boom” period. Most critics are also in accordance that the trigger of this crisis had to involve the subprime mortgage bubble—which collapsed in the United States—however, that alone could not represent the exact causality of this crisis. Just as in the Great Depression, there were a variety of contributing factors that resulted in this financial catastrophe.

Despite evidence of this evolving predicament—present throughout 2006 and 2007—the full extent of the crisis wasn’t realized until 2008 when several key banks (such as the Lehman Brothers) began to fall, and the price of financial assets subsequently plummeted. This caused bank lending to grind to a “thundering halt” and economies began to suffer worldwide. However, one cannot rush to conclusions by assuming this was solely a monetary crisis—there were much deeper dynamics at work. Most notably the ‘financialization’ of contemporary capitalism—which allowed for the emergence of new levels of renters defined predominantly by their relationship to the financial system, as opposed to their ownership of loanable capital. One exemplary illustration of this can be seen in the subprime mortgage crisis. McNally explains how there was $130 billion dollars of subprime lending in year 2000, backed by $55 billion in mortgage bonds. However, in just three years these numbers rose to $625 billion backed by $500 billion. Essentially, this meant that a subprime mortgage based bond grew nearl...

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...h also portrayed easy flows of credit at the time which, in turn, led to the development of speculative bubbles, in addition to advancing property based (and stock market) excess. Each crisis even shared declines in industry production and asset prices, rises in unemployment, as well as breakdowns of various key financial institutions. On the other hand, there are also vast differences between the great recession and the great depression—primarily referring to the change in the capitalist system toward financial capitalization as opposed to the earlier focus on productive industrialization. The different policy responses of the government in each of these crises also illustrated that lessons had in fact been learned—given that Keynesian and central bank intervention became preferred when compared to the laissez-faire attitude present during the Great Depression era.