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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.
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.
It seemed as if financial meltdown was not only a possibility, it was a certainty unless drastic action was taken. In August 2007, the French bank, BNP Paribas, suspended three investment funds worth €2 billion because of problems in the US sub-prime sector.
In these circumstances, it has been natural to ask what the historical experience of the crisis of the 1930s has to teach us.
The big lesson that has been correctly identified is not to be passive in the face of large adverse financial shocks.
The run on Northern Rock was an extraordinary event for the UK.
During the Great Depression no British financial institution failed, or looked like failing, but in 2007 there was immediate depositor panic.
Even in recovery, both the UK and the USA experienced persistent mass unemployment, which was the curse of the depression decade (Table 2).
Why did the eradication of unemployment prove to be so intractable?
By the late twentieth century, the memory of international financial seizure in the US and Europe, mass unemployment, and severe deflation had receded.
However, during 2007–8, an astonishing and unexpected collapse occurred which caused all key economic variables to fall at a faster rate than they had during the early 1930s.