Financial Crisis and Paradigm Shift of American Economic Policy: The Comparison with 1929 and 2008

The 2008 financial crisis, gaining greater intensity since September 2008, spread to the whole world. Due to the tight connection of global economy, the crisis damaged heavily the American domestic economy and the world economy, and its influence remained not only in the monetary aspect but in the real aspect as well. This thesis contends that the 2008 financial crisis is the most serious meltdown since the 1929 Great Depression, and it uses “Most Similar Systems Designs” as its research tool to build up the comparability between the two crises in terms of their scale, essence, root, and effect. This thesis tries to answer two questions: 1) Why did the American government alter its economic policy paradigmatically after the Great Depression? 2) In comparison with the Great Depression, will the American government shift its economic policy from Neo-Liberalism to Keynesian, leading to another paradigm shift?

Chapter 3 answers the first question. The answer lies in the institutional factors, the idea factors, and the exogenous factors. Institutionally, due to the second recession between 1938-1939, President Roosevelt commenced to acknowledge the importance of expansionary fiscal policy. In the idea aspect, because of the outbreak of the Second World War, the ability and the legitimacy of governmental interference had been affirmed, and be it politicians, epistemic community, or the public all admitted that the government should intervene in the economy when it comes to catastrophic crisis. Consequently, it is the exogenous factors (the second recession and the Second World War) that provided the key element changing the institutional and the idea factors, and the American economic policy had been shifted from Neo-classical School of Economics to Keynesianism and lasted for 30 years.

Chapter 4 and Chapter 5 answer the second question. No, the American government will not make another paradigm shift. When the two crises broke out, the government institutionally bailed out the financial sectors and main enterprises. But the Obama administration took the Great Depression as an object lesson and reacted fundamentally and confidently. We could say the American economic policy during the 2008 crisis has been changed dramatically. The uncontrollable spread of the 2008 crisis stimulated the American government to react swiftly, but such a reaction ironically did not lead to a second paradigm shift that the nation has seen since the Great Depression. The second recession and the Second World War pushed the American government to adopt the Keynesian way. During the Great Depression, the American leaders did not switch its economic policy to Keynesianism until the second recession. They worked with the epistemic community while acquiring public support. On the contrary, the Obama administration’s bail-out policies carried the Keynesian ideology while deliberately denying the connection with the New Deal. Most of the economic bureaucracy remains neo-liberal to focus on financial regulatory reform instead of the Keynesian expansionary fiscal policy. Without the public fiercely condemning the bail-out policies, and due to the rapid recovery in early 2009, the governmental interference to stop the 2008 crisis remained a short-term policy change instead of a grassroots paradigm shift. Anyways, the 2008 financial crisis did change institutionally. Lack of the idea factors and the exogenous factors resulted in the failure of a paradigm shift in American economic policy.

Although the 2008 financial crisis did not generate a paradigm shift, it still plays an important role economically and politically. Chapter 6 suggests that the crisis has no doubt challenged the American hegemony in the international society, especially from the emerging world such as China. However, it only represents one of the challenges rather than a replacement of its hegemonic status. From now on, the American government will strengthen the neo-liberal idea to supervise the financial market in order to avoid moral hazards and to reveal market intelligence. Keynesianism is fading out.