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In August, Bear Stearns, an international finance house heavily involved in the sub-prime market, teetered on the verge of bankruptcy. At the same time Lehman Brothers, the fourth largest investment bank in the US, declared bankruptcy.
How effective were national economic policy measures designed to lessen the impact of the depression?
Did governments try to coordinate their economic policies? Why did the intensity of the depression and the recovery from it vary so markedly between countries?
The financial tidal wave was totally unexpected and was of such severity that immediate policy action was required to prevent total meltdown.
For a while it seemed that the world stood at the edge of an abyss, a short step away from an even greater economic disaster than had occurred three-quarters of a century earlier.
Meanwhile, the European Central Bank was forced to intervene to restore calm to distressed credit markets which were badly affected by losses from sub-prime hedge funds.
On 14 September 2007, the British public became aware that Northern Rock, which had moved into sub-prime lending after concluding a deal with Lehman Brothers, had approached the Bank of England for an emergency loan.
In 1931, Keynes observed that the world was then ‘in the middle of the greatest economic catastrophe . Why the crisis began in 1929 is an obvious start, but more important questions are why it was so deep and why it lasted so long?
Sustained recovery did not begin in the United States until the spring of 1933, though the UK trough occurred in late 1931 and in Germany during the following year.
Why and how did the depression spread so that it became an international catastrophe?
What role did financial crises play in prolonging and transmitting economic shocks?