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Until recently, some economists believed that this economic crisis would end when investors returned to the stock market and recapitalized banks. But investors lacked confidence, thinking that they would be throwing good money after bad. The dubious assets buried deep in bank balance sheets still had to be cleansed, but trying to sell them off would further decrease their market value and compound banks' losses. Thus the bottom could not be reached until the investors returned, but investors would stay on the sidelines until asset prices hit bottom.

The initial rescue package from former Treasury Secretary Paulson was aimed at addressing this dilemma by trying to provide a floor to falling asset prices. The Paulson plan failed to change investors' expectations or persuade financial markets that it could provide the bottom that the market would not, and it is doubtful that the latest Geithner-Summers Plan will do so either.

It is clear that this is no ordinary recession. While there is no consensus on how to revive banks, there appears to be considerable agreement that extreme monetary easing and a massive fiscal stimulus are necessary to prevent the current slump from getting even worse. There is, however, a panacea of sorts for the broken machinery of the global economic system.

While an emphasis on reviving banks and an injection of public spending are both important, the trouble is that neither one directly addresses the main source of global deflation, which is that global imbalances are no longer being recycled effectively. Because U.S. households and banks are now bankrupt, the United States has lost much of its capacity to absorb and recycle foreign trade surpluses. That, in a nutshell, is the driving force behind the global deflationary trend.

Substituting massive public spending for private consumption and putting banks on life support are at best stopgap measures, and it is unlikely that they will bring back the ability to recycle trade surpluses. Even in the best-case scenario, where confidence in the dollar holds up, the broken machinery that produced the world's credit supply cannot not be reassembled because too many borrowers and intermediaries are insolvent. There is no easy way to make the debt overhang go away, and neither tax cuts nor cleansing banks of toxic assets will bring about a lasting increase in private consumption.

If confidence in the dollar ebbs and a slide/rush to gold occurs, the situation will be further complicated. The 1920s and 1930s offer a lesson on the dangers posed by a potential slide/rush into gold. Following the Fed's shift to tight money in 1928, the capital flow from the United States to Europe began to reverse and the deficit countries were forced to deflate, increasing doubts about the overvalued sterling and the dollar. A destabilizing dynamic was set in motion-more confidence eroded fear of devaluation, which led countries to liquidate foreign exchange (sterling and dollar) in favor of gold in their reserves, and the devaluation risk rose further. The extinction of monetary reserves caused by the dwindling foreign exchange led to a progressive contraction of money supply and credit, making the slump worse and further undermining the confidence in the monetary system.

There are no fixed parities to defend today, whether against gold or any other currency, and the Fed is doing exactly the opposite of what it did then. However, there are also unmistakable parallels. Just like then, a process of deflation driven by the disruption of the recycling of trade surpluses is threatening global financial disintermediation. Similarly, the erosion of confidence is again liable to cause a massive monetary contraction and fragmentation of trade around the world in the following years.

This time, the stakes are higher and there is less room to maneuver, given that the share of dollars in international reserves is far larger now than it was in the late 1920s. If financial sentiment forces the United States to choose between trying to keep unemployment from rising further into double digits or defending the dollar, the United States could probably succeed in neither. Reversing its policy of extreme monetary easing and fiscal stimulus in order to defend the dollar could be as disastrous as letting its value fall. Unlike the 1930s, depreciating the dollar is much less of an option, as its deflationary impact abroad would come back to haunt the United States.

The advantage the United States enjoys in being able to issue its liabilities in its own currency can turn into a liability. The United States has been spared the worst ravages of this financial crisis because of this ability. There is a potential downside, though. Most countries that had a currency crisis in the 1990s experienced a speedy, V-shaped recovery mainly because the sharp capital account reversals they experienced provided an unambiguous market signal that asset price deflation had hit bottom and overshot, which led to a strong surge in capital inflow and a speedy end to the crisis. The trouble now is that no quick obvious market-driven bottom to asset price deflation can conceivably exist in the event of a dollar crisis because of the massive size of the dollar reserves outside the United States. Sharp dollar devaluation can cause these reserves to unravel and would result in a massive dollar overhang, causing serious damage to world trade.

The United States' current policy ignores the possibility that changes in financial sentiment might eventually force its hand on the dollar. The extreme monetary easing and a massive fiscal stimulus being implemented amounts to fighting deflation by trying to destabilize the monetary standard to induce inflation. If it fails, the current slump can turn into a great depression worse than the last, and if it works, the resulting inflation will probably make the 1970s look good. But, given the severity of the situation, what else can be done?

Given that the problem is not the global imbalances per se, but how financial deregulation and the global order absorbed and recycled them, a safer approach would target the following three objectives: first, the reassertion of public control over the credit creation process; second, preparing for the possibility that the value of the dollar dives; and third, resuming recycling trade surpluses before contraction begins to destroy them. We have to wean the world off its dependence on U.S. overspending without sticking the United States and the world economy in a depression. That requires that the global monetary standard, and by extension the integrity of monetary reserves, is safeguarded as more stimulus is implemented.

A credible plan to achieve this would involve figuring out a way to drive a wedge between the global dollars accumulated in foreign reserves and the domestic dollars that the United States will be creating at a much faster clip. That way, the world economy can reinflate at the same time, since everyone would be able to devalue in relation to a stable monetary standard.

Technically, this wouldn't be hard to do. An idea such as setting up a substitution account at the International Monetary Fund to convert unwanted dollars to special drawing rights can be considered. The idea was considered before in the late 1970s when international confidence in the dollar was ebbing, only to be shelved once the political swing to the right made it redundant. In principle, the IMF could issue as many new SDRs as demanded without being inflationary, and could even refashion itself as the asset manager of the world. The IMF could even help generalize new instruments such as the proposed Asia bond by using Chinese reserves.

The real question is whether there will be the political will to carry out these proposals. Will the United States have the wisdom to decouple the world economy from the dollar? Will the United States and China, who have the most to gain from cooperation, be able to do so? Will the G-20 be the driving force behind a new global accord? Much rests on whether the Obama Administration can move past a dollar-centric economic paradigm.

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Policy Innovations Digital Magazine (2006-2016): Commentary: Decouple the World from the Dollar

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We have to wean the world off its dependence on U.S. overspending without sticking the United States and the world economy in a depression, says Korkut Erturk. A credible plan to achieve that would involve figuring out a way to drive a wedge between the global dollars accumulated in foreign reserves and the domestic dollars that the United States will be creating at a much faster clip.

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reckless speculation: people put their savings into stocks and the stock market underwent rapid expansion, reaching its peak in August 1929.

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reckless speculation: people put their savings into stocks and the stock market underwent rapid expansion, reaching its peak in August 1929.

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banks had an excess of large loans that could not be liquidated.

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banks had an excess of large loans that could not be liquidated.

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Congress passed a bill worth $800 billion in 2009 to promote economic recovery.

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2008 Recession: What it Was and What Caused It

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The Great Recession was a sharp decline in economic activity from 2007-2009 and was the largest economic downturn since the Great Depression.

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During times of national crisis, Congress has responded by directing funding and federal programs toward providing relief to struggling Americans. While responding to crises quickly is important, so is ensuring federal programs and taxpayer resources are used as intended.

Today's WatchBlog post looks at GAO's role during times of crisis-specifically in monitoring the federal responses to the Great Depression, the Great Recession, and the coronavirus pandemic.
The Great Depression
GAO was founded in 1921 and was very much still a young agency when the stock market crashed in 1929-causing the prolonged period of economic downturn known as the Great Depression.

In response to the Great Depression, Congress approved President Franklin Roosevelt's New Deal, which provided $41.7 billion in funding for domestic programs like work relief for unemployed workers.

As federal money was pouring into the recovery and relief efforts of the 1930s, GAO's workload increased. With about 1,700 employees at the time, GAO soon found itself shorthanded and needed to hire more employees to process paperwork, such as vouchers. By 1939, our workforce nearly tripled to 5,000.

Around this same time, our auditors began expanding their role in overseeing federal programs. Fieldwork began in the mid-1930s, including reviews of government agriculture programs in Kentucky and several southern states. This gradual change in mission from serving as federal accountants to program and policy analysts would continue through 2003, when GAO changed its name from the General Accounting Office to the Government Accountability Office.
The Great Recession
The Great Recession that began in December 2007 was believed to be the worst economic downturn the country had experienced since the Great Depression.

In response, Congress passed the American Recovery and Reinvestment Act of 2009, which included $800 billion to promote economic recovery. The Recovery Act assigned GAO a range of responsibilities to help promote accountability and transparency in the use of those funds. For example, we provided bimonthly reviews of the use of funds by selected states and localities. We also provided targeted studies in areas like small business lending, education, and trade adjustment assistance.

While the Great Recession ended in 2009, our work examining its impacts on the health of our financial system and related government assistance continues. For example, in response to the 2008 housing crisis, the Treasury Department used Troubled Asset Relief Program (TARP) funding to establish 3 housing programs to help struggling homeowners avoid foreclosure and preserve homeownership. During the recession and subsequent years, we examined TARP programs every 60 days and recommended actions to enhance Treasury's management of the programs and use of funds. We continue this work today-auditing TARP financial statements and providing updates on active TARP programs each year. Our most recent report was issued in December 2020.

Similarly, we continue to monitor the stability of the nation's housing finance system-including Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold these mortgages or package them into mortgage-backed securities that may be sold. In 2008, the federal government took control of Fannie and Freddie and has continued to maintain this role 13 years later-leaving taxpayers on the hook for any potential losses incurred by the two entities. In January 2019, we reported about the risks of this prolonged conservatorship and the need to reform the housing finance system.
The Coronavirus Pandemic
In response to the pandemic, Congress appropriated $4.7 trillion in emergency assistance for people, businesses, the health care system, and state and local governments. We have been following the federal response by-among other things-regularly issuing reports on the impacts of the pandemic and response efforts on federal programs and operations.

Our reporting has looked at programs and spending across the federal government, including-among things-vaccine development and distribution, small business lending, unemployment payments, economic relief checks, tax refund delays, K-12 and higher education's response to COVID-19, housing protections, and more.

On July 19, we issued our latest report about the federal response and our recommendations for continued improvement of this effort. Our next report issues in October. Visit our Coronavirus Oversight page frequently as we will continue to report on the federal response to COIVD-19 as the crisis continues.
GAO's Ongoing Benefits
While GAO has played a critical role in overseeing federal spending and programs during times of crisis, we're also playing this role during less trying times. Each year, we issue hundreds of reports and testify before dozens of congressional committees and subcommittees on the issues affecting our nation. In fiscal year 2020, we saved taxpayers $77.6 billion in federal spending. That's $114 dollars for every dollar Congress invests in us!

Learn more about our work by visiting GAO.gov.

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GAO at 100: Our Role During Times of National Crisis-The Great Depression, The Great Recession, and The Coronavirus Pandemic

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During times of national crisis, Congress has responded by directing funding and federal programs toward providing relief to struggling Americans. While responding to crises quickly is important, so is ensuring federal programs and taxpayer resources are used as intended.

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The US Federal Bank Reserve took monetary policies to prevent the crash from further damaging the global economy.

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The global financial crisis resulted from the bursting of the US housing bubble during 2005–06.

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The global financial crisis resulted from the bursting of the US housing bubble during 2005–06.

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The US GDP contracted by ~4%, while the global GDP declined by ~5% during the period.

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The US GDP contracted by ~4%, while the global GDP declined by ~5% during the period.

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During the Great Recession, unemployment in the US peaked at ~10% in October 2009.

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During the Great Recession, unemployment in the US peaked at ~10% in October 2009.

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The Fed slashed the interest rates and pumped a significant amount of liquidity for the 2008 crisis

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The Fed slashed the interest rates and pumped a significant amount of liquidity for the 2008 crisis

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into the system.

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The Fed increased the interest rates to restrict speculation in the securities market for the great depression.

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The Fed increased the interest rates to restrict speculation in the securities market for the great depression.

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Effects of the great recession were only seen for around 19 months, while effects of the great depression were seen for almost a decade.

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Both the events followed periods of excellent economic growth.

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Both the events followed periods of excellent economic growth.

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Both the events were followed by the government’s massive involvement in the economic alleviation and ushering in several policies and regulations.

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Both the events were followed by the government’s massive involvement in the economic alleviation and ushering in several policies and regulations.

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What Caused the Great Depression?

Throughout the 1920s, the U.S. economy expanded rapidly, and the nation's total wealth more than doubled between 1920 and 1929, a period dubbed " the Roaring Twenties."

The stock market, centered at the New York Stock Exchange on Wall Street in New York City, was the scene of reckless speculation, where everyone from millionaire tycoons to cooks and janitors poured their savings into stocks. As a result, the stock market underwent rapid expansion, reaching its peak in August 1929.

By then, production had already declined and unemployment had risen, leaving stock prices much higher than their actual value. Additionally, wages at that time were low, consumer debt was proliferating, the agricultural sector of the economy was struggling due to drought and falling food prices and banks had an excess of large loans that could not be liquidated.

The American economy entered a mild recession during the summer of 1929, as consumer spending slowed and unsold goods began to pile up, which in turn slowed factory production. Nonetheless, stock prices continued to rise, and by the fall of that year had reached stratospheric levels that could not be justified by expected future earnings.

Stock Market Crash of 1929

On October 24, 1929, as nervous investors began selling overpriced shares en masse, the stock market crash that some had feared happened at last. A record 12.9 million shares were traded that day, known as "Black Thursday."

Five days later, on October 29, or "Black Tuesday," some 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks "on margin" (with borrowed money) were wiped out completely.

As consumer confidence vanished in the wake of the stock market crash, the downturn in spending and investment led factories and other businesses to slow down production and begin firing their workers. For those who were lucky enough to remain employed, wages fell and buying power decreased.

Many Americans forced to buy on credit fell into debt, and the number of foreclosures and repossessions climbed steadily. The global adherence to the gold standard, which joined countries around the world in fixed currency exchange, helped spread economic woes from the United States throughout the world, especially in Europe.

Bank Runs and the Hoover Administration

Despite assurances from President Herbert Hoover and other leaders that the crisis would run its course, matters continued to get worse over the next three years. By 1930, 4 million Americans looking for work could not find it; that number had risen to 6 million in 1931.

Meanwhile, the country's industrial production had dropped by half. Bread lines, soup kitchens and rising numbers of homeless people became more and more common in America's towns and cities. Farmers couldn't afford to harvest their crops and were forced to leave them rotting in the fields while people elsewhere starved. In 1930, severe droughts in the Southern Plains brought high winds and dust from Texas to Nebraska, killing people, livestock and crops. The " Dust Bowl " inspired a mass migration of people from farmland to cities in search of work.

In the fall of 1930, the first of four waves of banking panics began, as large numbers of investors lost confidence in the solvency of their banks and demanded deposits in cash, forcing banks to liquidate loans in order to supplement their insufficient cash reserves on hand.

Bank runs swept the United States again in the spring and fall of 1931 and the fall of 1932, and by early 1933 thousands of banks had closed their doors.

In the face of this dire situation, Hoover's administration tried supporting failing banks and other institutions with government loans; the idea was that the banks in turn would loan to businesses, which would be able to hire back their employees.

FDR and the Great Depression

Hoover, a Republican who had formerly served as U.S. secretary of commerce, believed that government should not directly intervene in the economy and that it did not have the responsibility to create jobs or provide economic relief for its citizens.

In 1932, however, with the country mired in the depths of the Great Depression and some 15 million people unemployed, Democrat Franklin D. Roosevelt won an overwhelming victory in the presidential election.

By Inauguration Day (March 4, 1933), every U.S. state had ordered all remaining banks to close at the end of the fourth wave of banking panics, and the U.S. Treasury didn't have enough cash to pay all government workers. Nonetheless, FDR (as he was known) projected a calm energy and optimism, famously declaring "the only thing we have to fear is fear itself."

Roosevelt took immediate action to address the country's economic woes, first announcing a four-day "bank holiday" during which all banks would close so that Congress could pass reform legislation and reopen those banks determined to be sound. He also began addressing the public directly over the radio in a series of talks, and these so-called " fireside chats " went a long way toward restoring public confidence.

During Roosevelt's first 100 days in office, his administration passed legislation that aimed to stabilize industrial and agricultural production, create jobs and stimulate recovery.

In addition, Roosevelt sought to reform the financial system, creating the Federal Deposit Insurance Corporation ( FDIC) to protect depositors' accounts and the Securities and Exchange Commission (SEC) to regulate the stock market and prevent abuses of the kind that led to the 1929 crash.

The New Deal: A Road to Recovery

Among the programs and institutions of the New Deal that aided in recovery from the Great Depression was the Tennessee Valley Authority (TVA), which built dams and hydroelectric projects to control flooding and provide electric power to the impoverished Tennessee Valley region, and the Works Progress Administration (WPA), a permanent jobs program that employed 8.5 million people from 1935 to 1943.

When the Great Depression began, the United States was the only industrialized country in the world without some form of unemployment insurance or social security. In 1935, Congress passed the Social Security Act, which for the first time provided Americans with unemployment, disability and pensions for old age.

After showing early signs of recovery beginning in the spring of 1933, the economy continued to improve throughout the next three years, during which real GDP (adjusted for inflation) grew at an average rate of 9 percent per year.

A sharp recession hit in 1937, caused in part by the Federal Reserve's decision to increase its requirements for money in reserve. Though the economy began improving again in 1938, this second severe contraction reversed many of the gains in production and employment and prolonged the effects of the Great Depression through the end of the decade.

Depression-era hardships fueled the rise of extremist political movements in various European countries, most notably that of Adolf Hitler's Nazi regime in Germany. German aggression led war to break out in Europe in 1939, and the WPA turned its attention to strengthening the military infrastructure of the United States, even as the country maintained its neutrality.

African Americans in the Great Depression

One-fifth of all Americans receiving federal relief during the Great Depression were Black, most in the rural South. But farm and domestic work, two major sectors in which Black workers were employed, were not included in the 1935 Social Security Act, meaning there was no safety net in times of uncertainty. Rather than fire domestic help, private employers could simply pay them less without legal repercussions. And those relief programs for which African Americans were eligible on paper were rife with discrimination in practice since all relief programs were administered locally.

Despite these obstacles, Roosevelt's "Black Cabinet," led by Mary McLeod Bethune, ensured nearly every New Deal agency had a Black advisor. The number of African Americans working in government tripled.

Women in the Great Depression

There was one group of Americans who actually gained jobs during the Great Depression: Women. From 1930 to 1940, the number of employed women in the United States rose 24 percent from 10.5 million to 13 million Though they'd been steadily entering the workforce for decades, the financial pressures of the Great Depression drove women to seek employment in ever greater numbers as male breadwinners lost their jobs. The 22 percent decline in marriage rates between 1929 and 1939 also created an increase in single women in search of employment.

Women during the Great Depression had a strong advocate in First Lady Eleanor Roosevelt, who lobbied her husband for more women in office-like Secretary of Labor Frances Perkins, the first woman to ever hold a cabinet position.

Jobs available to women paid less but were more stable during the banking crisis: nursing, teaching and domestic work. They were supplanted by an increase in secretarial roles in FDR's rapidly-expanding government. But there was a catch: over 25 percent of the National Recovery Administration's wage codes set lower wages for women, and jobs created under the WPA confined women to fields like sewing and nursing that paid less than roles reserved for men.

Married women faced an additional hurdle: By 1940, 26 states had placed restrictions known as marriage bars on their employment, as working wives were perceived as taking away jobs from able-bodied men-even if, in practice, they were occupying jobs men would not want and doing them for far less pay.

Great Depression Ends and World War II Begins

With Roosevelt's decision to support Britain and France in the struggle against Germany and the other Axis Powers, defense manufacturing geared up, producing more and more private-sector jobs.

The Japanese attack on Pearl Harbor in December 1941 led to America's entry into World War II, and the nation's factories went back into full production mode.

This expanding industrial production, as well as widespread conscription beginning in 1942, reduced the unemployment rate to below its pre-Depression level. The Great Depression had ended at last, and the United States turned its attention to the global conflict of World War II.

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HISTORY Vault

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Great Depression: Black Thursday, Facts & Effects

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The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. At its peak, the U.S. unemployment rate topped 20 percent.

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Congress passed the Dodd-Frank Act in 2010 to institute banking regulations, preventing another financial crisis.

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considered the two greatest economic disasters experienced in the US in the last one hundred years.

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considered the two greatest economic disasters experienced in the US in the last one hundred years.

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 the U.S. economy suffered a steep output decline that followed a long economic expansion marked by financial excesses

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 the U.S. economy suffered a steep output decline that followed a long economic expansion marked by financial excesses

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Congress approved the New Deal from President Franklin Roosevelt, providing $41.7 billion for domestic program funding.