American University Macroeconomics 2020, Group 29

2. The Great Depression was a worldwide economic crisis that began in 1929 and
ended in 1939. It originated in the United States but affected international
economics because it caused changes in economic institutions, decline in output,
and severe unemployment. The depression lasted longer and was much more
severe than previous downturns due to the interventionist monetary policies
passed by the government.
The economic downturn was caused by haphazard monetary policies pushed by
the Federal Reserve Banks as part of a “boom and burst” business cycle pattern. It
was made hard to recognize due to expansionary monetary policies in the 1920’s
(Fishback, 2010; Belsie, 2016; Cogley, 1999; Edwards, 2005; What caused the
Great Depression?, 2018)

3. 1924-1927: Credit expansion
under the Coolidge
Administration
1929: Federal Reserve
abandons expansionary
monetary policies
~1929
Fiscal Policy Monetary Policy
1933
FDR abandoned the gold
standard
1930: Smoot-Hawley
tariff- implemented
protectionist trade
policies
1932: American exports
fall drastically
1931: Hoover increases
subsidy and relief schemes
1932: Income tax
doubled
1932: FDR elected,
New Deal begins
(Jacobson et al., 2019)

4. 1933
Fiscal Policy Monetary Policy
1941
1935: The Social Security
Administration was created
1929-1933: Federal Reserve
lowered the money supply
by ⅓
1935: The National Industrial Recovery
Act and The National Recovery
Administration: established fair
working conditions, hours, and wages.
It set a minimum wage and banned
youth labor.
As a result of this act unemployment
rose to nearly 13 million,
disproportionately impacting POC
1933: As a result of FDR
seizing gold holdings, he
devalued the dollar by 40%
Throughout the early 1930s,
many banks went into
failure as a result of fear
from citizens and the Fed’s
monetary policy
1941: The United States entered WWII
which effectively ended, per historians,
the Great Depression due to the
decline in unemployment and
increased government spending. (Jacobson et al., 2019; see also Edwards, 2005)

5. ● The main factor leading to the 2008 financial crisis was subprime
lending in the housing market, which is lending money for
mortgages to those with low credit scores (Collyns, 2008).
○ Many Americans could buy homes that in reality they couldn’t
afford, creating a housing bubble where the prices of homes
far exceeded their actual value, leading to many
homeowners defaulting on their loans and having their
homes foreclosed (Collyns, 2008).
● Subprime loans and mortgages were then sold in securitizations to
other institutions, so when owners defaulted, these institutions
were left with no income from them, incurring the complete cost
themselves (Collyns, 2008).

6. ● The combined effect of these meant economic disaster, as the general
populace couldn’t afford their homes or the basic cost of living, and the
other economic institutions were left bankrupt from purchasing
securities that could never be paid back (Duignan, 2019).
○ The 168-year-old investment bank Lehman Brothers, with $639
billion in assets, filed the largest bankruptcy in U.S. history in
2008, stemming from the failures of the securities (Duignan,
2019).
○ In the end, the U.S. GDP dropped 4% and almost every sector of
the economy was affected (Duignan, 2019).

7. [2]

8. ● Emergency Economic Stabilization Act of 2008 (EESA)
○ Authorized Secretary Paulson to buy back billions in mortgage backed
securities and other assets from financial institutions in order to increase
liquidity in the market
○ Minimized foreclosures on federally owned mortgages
○ Created an oversight board for the Treasury Department
○ Hope for Homeowners
■ Voluntary government program to refinance unaffordable
mortgages to combat foreclosures (Hope for Homeowners, n. d.)
○ Troubled Asset Relief Program (TARP)
■ Protect the ability of consumers and business to secure credit
■ The government’s purchase of illiquid assets would make it easier
for banks and institutions to extend credit to consumers, regaining
some confidence in the market
(Duignan, 2019)

9. ● Much of the Federal Reserve’s response to the 2008
financial crisis revolved around cutting the federal funds rate
from about five percent down to almost zero percent.
● The Fed used the discount window to provide short-term
liquidity to banks, depository institutions, and other financial
institutions (The Fed's Monetary Policy Response to the
Current Crisis, 2009).
● Through open-market operations, The Fed supported the
traditional credit market by putting downward pressure on
long-term interest rates and purchasing long-term securities
● Through quantitative easing, The Fed bought up longer-term.
debt issues from the federal government, Fannie Mae, and
Freddie Mac (Yglesias, 0215).
*FOMC stands for the Federal Open Market Committee
[3]

10. March-April: Number of cases start to
rise exponentially
May/June: Number of cases start to
decline and economies in some states
begin to re-open.
August/September: Number of
cases start to rise again.
January: First case in the USA.
- The economic downturn of COVID-19 in the USA has been
significant. The American economy contracted at an annualized
rate of 31.7 percent in the second quarter and While U.S.
economic output rebounded significantly last quarter (33.1%), it
remains below pre-pandemic levels (US Economy at a Glance,
2020).
- The unemployment rate has improved from its peak of 14.7
percent in April of this year, which was the highest of any month
since January 1948 — when data were first collected, today it is
at 7.9% (Policy Responses to COVID-19, 2020).
(Timeline of Events Related to the COVID-19 Pandemic, 2020)

11. - $483 billion Paycheck Protection Program and Healthcare Advancement act
- $321 billion- Small Business Administration loans and guarantees for businesses that retain workers during the pandemic
- $62 billion- for Small Business Administration to provide loans and grants
- $75 billion for hospitals
- $25 billion for virus testing
- $ 3.2 trillion CARES act
- $293 billion for one time tax rebates to individuals
- $268 billion for unemployment benefits
- US$25 billion to provide a food safety net for the most vulnerable
- US$510 billion to prevent corporate bankruptcy by providing loans, guarantees, and backstopping Federal Reserve 13(3)
program
- US$349 in Small Business Administration loans and guarantees to help small businesses that retain workers
- $100 billion for hospitals,
- US$150 billion in transfers to state and local governments
- US$49.9 billion for international assistance
- $ 8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act
- Virus testing
- 2 weeks paid sick leave, up to 3 months emergency leave for those infected
- Expansion of Small Business Administration Loan subsidies
- $1.25 billion international assistance
All data from (Policy Responses to COVID-19, 2020; Cheng et al., 2020)

12. - Acts to try and aid it's population
- About 2.6 trillion dollars of investment in corona
virus legislation.
- US$8.3 billion Coronavirus Preparedness and Response
Supplemental Appropriations Act
- US$192 billion Families First Coronavirus Response Act.
- Gov used $44 billion from the Disaster Relief Fund
- Provide unemployment benefits, continuing
student loan payment relief, deferring employee
social security taxes, identify options to help
renters and homeowners avoid evictions and
foreclosure.
- US$8.3 billion Coronavirus Preparedness and Response
Supplemental Appropriations Act and US$192 billion
Families First Coronavirus Response Act.

13. - Federal Reserve introduced facilities to support the flow of
credit, in some cases using funds appropriated under the
CARES Act.
- Supervisory action. Federal banking supervisors encouraged
depository institutions to use their capital and liquidity buffers
to lend, to work constructively with borrowers affected by
COVID-19.
- Fannie Mae and Freddie Mac have announced assistance to
borrowers.
- The Federal Reserve has also lowered the target for federal
funds rate, what banks pay to borrow from each other, and
has stated that the key interest rates will continue to remain
low.
- The interest rate on 10-year treasury notes has also been at a
very low level, at 0.63% so that the Treasury has been able
to borrow cheaply.
- The Federal Reserve is also trying to support market
functioning by purchasing $700 billion in securities
All data from (Policy Responses to COVID-19, 2020; Cheng et al., 2020)

14. POLICY TIMELINE
February 28: Largest single week stock
market decline since 2008
March 18: Families First Coronavirus
Response Act is signed, guaranteeing tax
credit and paid sick leave to some families March 27: CARES act signed
into law
April 9: Federal Reserve announces it will
provide up to $2.3 billion in loans to support
the economy
April 24: Paycheck protection program and
Health Care Enhancement Act signed into law
June 8:Federal Reserve expands main
street lending program, allowing more small
and medium sized businesses to receive
loans
April 6: Federal Reserve announces Paycheck
Protection Program Lending Facility
March 6: Coronavirus Preparedness and
Response Supplemental Appropriations
Act signed into law
June 26: Florida and Texas are among the
first states to reverse reopenings
(Timeline of Events Related to the COVID-19 Pandemic, 2020)

15. [4]
[1]
[1]

16. ● The Great Depression showed the United States that economic policy and government
intervention is necessary during crises. However, there is a right and wrong amount of
intervention, like FDR demonstrated, that creates a deeper recession or a solution.
● To combat the 2008 crisis, a mixed approach of fiscal and monetary policy was needed.
When they came together, through nationalizing programs like Fannie Mae and Freddie
Mac and influencing their interest rates, they were able to have the most profound and
positive impact on the economy.
● The American response to COVID-19 is similar to what Keynes recommended during the
Great Depression. The US government is increasing government expenditures to
combat the economic and health effects of the virus and tax cuts and loans to try to
stimulate the economy. Just like the response to the Great Depression, the government
is trying to find a balance in economic intervention.

17. References
Belsie, L. (2016, November). Fed Strategies in the Great Depression and the Great Recession. National Bureau of Economic Research.
Retrieved November 6, 2020, from https://www.nber.org/digest/nov16/fed-strategies-great-depression-and-great-recession
[1] Charm, T., Grimmelt, A., Kim, H., Robinson, K., Lu, N., Mayank, Ortega, M., Staack, Y., & Yamakawa, N. (2020, October 26).
Consumer sentiment and behavior continue to reflect the uncertainty of the COVID-19 crisis. McKinsey and Company. Retrieved
November 6, 2020, from https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/a-global-view-of-how-
consumer-behavior-is-changing-amid-covid-19#
Cheng, J., Skidmore, D., & Wessel, D. (2020, July 17). What's the Fed doing in response to the COVID-19 crisis? What more could it do?
Brookings. Retrieved November 6, 2020, from https://www.brookings.edu/research/fed-response-to-covid19/
Cogley, T. (1999, March 26). Monetary Policy and the Great Crash of 1929: A Bursting Bubble or Collapsing Fundamentals? Federal
Reserve Bank of San Francisco. Retrieved November 6, 2020, from https://www.frbsf.org/economic-research/
publications/economic-letter/1999/march/monetary-policy-and-the-great-crash-of-1929-a-bursting-bubble-or-collapsing-
fundamentals/#:~:text=In%20any%20event%2C%20monetary%20policy,economic%20activity%20and%20share%20prices

18. References
Collyns, C. (2008, December). The Crisis through the Lens of History. Finance and Development, 45(4).
https://www.imf.org/external/pubs/ft/fandd/2008/12/collyns.htm
Credit and Liquidity Programs and the Balance Sheet. (n.d.). The Federal Reserve. Retrieved November 6, 2020, from
https://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm
[2] Dow Jones - DJIA - 100 Year Historical Chart. (n.d.). Macrotrends. https://www.macrotrends.net/1319/dow-jones-100-year-historical-
chart
Duignan, B. (2019, October 7). Financial crisis of 2007–08. Britannica. Retrieved November 6, 2020, from
https://www.britannica.com/event/financial-crisis-of-2007-2008
Edwards, C. (2005, September). The Government and the Great Depression. Tax and Budget Bulletin, 25.
https://www.cato.org/sites/cato.org/files/pubs/pdf/tbb-0508-25.pdf
[3] The Fed's Monetary Policy Response to the Current Crisis. (2009, May 22). Federal Reserve Bank of San Francisco. Retrieved
November 6, 2020, from https://www.frbsf.org/economic-research/publications/economic-letter/2009/may/fed-monetary-policy-
crisis/

19. References
Fishback, P. (2010). US monetary and fiscal policy in the 1930s. Oxford Review of Economic Policy, 26(3), 385-413.
https://doi.org/10.1093/oxrep/grq029
Hope for Homeowners. (n.d.). Benefits.gov. Retrieved November 6, 2020, from https://www.benefits.gov/benefit/4589
Jacobson, M. M., Leeper, E. M., & Preston, B. (2019, March 18). Recovery of 1933. European Central Bank Eurosystem. Retrieved
November 6, 2020, from https://www.ecb.europa.eu/pub/conferences/shared/pdf/20191007_mo_po_conf/Recovery_of_1933.pdf
Policy Responses to COVID-19. (2020, October 24). The International Monetary Fund. Retrieved November 6, 2020, from
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19
Timeline of Events Related to the COVID-19 Pandemic. (n.d.). Federal Reserve Bank of St. Louis (FRASER). Retrieved November 6,
2020, from https://fraser.stlouisfed.org/timeline/covid-19-pandemic#126
[4] U.S. Economy at a Glance. (n.d.). Bureau of Economic Analysis. Retrieved November 6, 2020, from
https://www.bea.gov/index.php/news/glance
What Caused the Great Depression? (2018, February 2). Foundation for Economic Education. Retrieved November 6, 2020, from
https://fee.org/articles/what-caused-the-great-depression/

20. References
Yglesias, M. (2015, May 13). The Fed and the 2008 financial crisis. Vox. Retrieved November 6, 2020, from
https://www.vox.com/2014/6/20/18079946/fed-vs-crisis