The Economy

Great Depression vs. Great Recession: How They Compare

The Federal Reserve’s response to both events was one of the factors that resulted in two significantly different outcomes.
Ted JacksonFebruary 7, 2023
Great Depression vs. Great Recession: How They Compare
Photo: Getty Images

Since so many economists and C-suite execs are predicting a recession for the U.S. economy, now seemed like the right time to compare two of the worst economic periods in modern history: the Great Crash of 1929 and the deep depression that followed and the mortgage finance market panic and the Great Recession of 2008. The unprecedented crisis of 2008 posed a very serious threat to the global economy, but it did not produce results anywhere near as bad as those of the Great Depression, which created a high of 25% unemployment. During the Great Recession, the unemployment rate’s peak was 8.5%. 

Responding to Panic

One of the lucky things during the 2008 mortgage crisis, which actually began in 2007, was that Ben Bernanke was at the helm of the Federal Reserve. Bernanke had spent most of his academic career studying the events leading to and surrounding the Great Depression. Bernanke and two colleagues won the Nobel Prize in economic sciences last year for research on banks and financial crises.


Ben Bernanke

In September 2008, it became clear the federal government was not going to bail out Lehman Brothers, a venerable U.S. brokerage since the 1850s. Lehman Brothers’ huge mortgage-backed securities holdings had been mispriced. One cause: the credit rating agencies S&P and Moody’s allowed “AAA” credit ratings on billions of mortgage securities that didn’t merit the highest of highest credit ratings. The subsequent failure of Lehman Brothers set markets all over the world into a panic; fear was so high that markets basically stopped functioning properly. In short, the country faced financial Armageddon. 

In response, the Federal Reserve Open Market Committee drastically lowered its short-term overnight federal funds rate to 0.25%, injecting badly needed liquidity into the banking system. It was the exact opposite of what the young Federal Reserve did in the wake of the 1929 crash and the approaching depression. 

The reaction at the Fed in the early 1930s, and other central banks worldwide, was to respond to the panic by raising interest rates. The thinking at the time was that this would tamp down on speculation in the wake of the 1929 stock market crash. But much later on, in the 1960s, famed economist Milton Friedman wrote his seminal Monetary History of the United States. Friedman showed how tightening monetary policy was the wrong policy to follow as runs on U.S. banks began to proliferate

Later on, Friedman would go on to write a famous cover article for the New York Times Magazine where he argued the social role of corporations is exclusively to increase profits. He also said the money supply was the most important factor in determining the rate of inflation, and thus the money supply should be the overwhelming focus of monetary policy. The article in the 1970s helped give birth to a movement called monetarism that dominated much of the policies at the Fed, especially in the 1980s, as well as at central banks worldwide

Misguided Tightening

It is generally accepted now the fault of the 1930s depression can be laid to a very large extent at the feet of a misguided tightening of monetary policy when economic demand was already plummeting. Banks were failing everywhere, due to a lack of liquidity, and taking people’s savings with them. But the 1930s crisis also has to be put into the context of drastically differing fiscal policy responses.


President Franklin D. Roosevelt signs the Social  Security Act. The law was part of Roosevelt’s New Deal program.

President Franklin D. Roosevelt was elected to the presidency in 1932 just as the economy was collapsing. Roosevelt’s fiscal policy response to the depression was to announce a pathbreaking group of legislative initiatives he called the New Deal, a policy of drastically increasing demand in the economy. 

Americans are now used to the government playing a big role in the economy — Social Security, FDIC deposit insurance, and massive government participation in the mortgage market through agencies such as Fannie Mae and Freddie Mac. But the New Deal was seen as too radical when it was introduced, certainly too radical at a time when capitalists everywhere still feared the rise of Bolshevism

Roosevelt had a devil of a time getting his jobs-producing legislation passed into law — one very successful result was the Hoover Dam. The problem for Roosevelt was the Supreme Court nixed key parts of the New Deal, the Agricultural Adjustment Act, and the National Recovery Administration

Fiscal Response Differences

Ultimately it was World II that pulled the United States out of the Great Depression. 

The differences between the fiscal response in the 1930s and the actions taken 70 or so years later in the financial crisis could not have been starker. It was clear to U.S. economic policymakers like Bernanke and U.S. Treasury Secretary and Goldman Sachs alumni Henry “Hank” Paulson that a giant fiscal package was going to be needed if markets and the banking system were to be calmed.


Henry “Hank” Paulson

In the space of a little more than a week, legislators on both sides of the aisle and President George W. Bush followed Bernanke’s and Paulson’s recommendation for a huge cash injection in the form of a $700 billion piece of legislation called TARP (the Troubled Assets Relief Program)

While Congress authorized $700 billion for TARP, the Treasury utilized far less than that. In fact, TARP’s lifetime cost is now estimated to have been approximately just $32.3 billion. 

Unwinding the Fed’s Balance Sheet

During the COVID-19 pandemic lockdowns, the size of the monetary and fiscal response by the Fed certainly had never even remotely been considered by Federal Reserve founders like Paul Hambros.  Scion of the famous Hamburg banking dynasty, he had been sent to New York to open an office there and had a big hand in founding the Federal Reserve shortly before the U.S. joined World War I. 

The Federal Reserve Building in Washington D.C.

As economists increasingly see a recession in the near future, the Fed’s balance sheet, which previously carried only treasury securities on its books, now is carrying trillions of mortgage-backed securities and even corporate bonds. Something Hambros and others who helped build the Fed would not have even contemplated that as a proper role for the central bank. 

In fact, since 2007, just before the housing crisis, the Fed’s balance sheet stood at just $0.9 trillion. It is now at a mind-boggling $8.4 trillion on January 30. As the Fed begins to unwind its huge balance sheet, a process known as quantitative tightening, it’s anybody’s guess what will happen because we are in uncharted monetary policy territory.

As of November 2022, the Fed had sold $289 billion of securities since the balance sheet’s peak in April 2022. In other words, it has engaged in quantitative tightening by that amount. It still has a long way to go, however, to totally unwind its experiment in quantitative easing.