The Stock Market Crash and Our Current Recession

October 28, 2009

This month marks 80 years since the Wall Street crash of 1929 that was one cause of the Great Depression. Economic Studies Senior Fellow Alice Rivlin says these events led to the creation of financial and social safety net measures that have successfully prevented economic disruption of the same magnitude since. Although the current recession is nowhere near the depths of the Depression, she says it will still take some time for the United States to fully recover, especially on the employment front.


“What happened in 1929 was people got carried away with the idea that stock prices were going to keep going up and that they would buy stocks and make a lot of money selling them at a higher price. Eventually, a bubble like that bursts. We had a bubble like that a year ago and it did burst. It was several different kinds of bubbles. It was a housing bubble and we were trading big blocks of derivatives that were based on those housing prices. When the inevitable happened and the housing prices came down, then the value of all of those instruments fell and the big financial institutions and the small financial institutions were in a good deal of trouble. It was a similar kind of phenomenon to 1929. The exuberance of a market gets a head of steam of its own and people begin to believe that it is going to go on forever, but of course it does not. When it crashes it is hard on everybody.

… I think this recovery will be very slow. It looks now that we will begin to have positive growth in the gross domestic product of this quarter and maybe the next quarter, but we will not have massive job creation. In fact, employment is still falling and we will probably have rising unemployment well into next year. That is partly because people are really scared. Consumers have pulled back and they should have. We were over-consuming. We were over-borrowing. That was part of the problem. We have to get on to a more sustainable track so that people consume out of their incomes, but also save something. That means that the economy will recover slowly. Jobs will recover slowly. It may be quite a long time – it may be a couple of years, maybe even longer – before we get back to what we used to think of as normal unemployment.”