DEL.ICIO.USAnother Great Depression? Experts say probably not
Similar conditions exist, but economic shrinkage, joblessness, stock woes not like that of ’30s
The Atlanta Journal-Constitution
Wednesday, October 22, 2008
In recent days, you’ve heard — a lot — how the current financial crisis is the worst since the Great Depression.
It may be. Much less clear is whether it will turn into anything actually like the Depression, when over three years the economy shrunk by nearly half and unemployment reached 24 percent.
AP
During the Great Depression, a line of jobless and homeless men wait outside to get free dinner at New York’s municipal lodging house in the winter of 1932-33. The current stock market has a long way to go to match the Great Depression’s collapse.
Current economic measures are still far cheerier than that. There are other reassuring differences as well.
As the Depression began, the nation had virtually no safety net for the needy and no regulation of banks. Government officials then were reluctant to rescue distressed players in the market.
Yet to some historians, today’s storyline has familiar themes.
“It is a very similar process to the Great Depression, because what you have is people not spending enough money,” said historian Bryant Simon of Temple University, director of American studies.
Debt-ridden consumers and troubled banks are toxic to a consumption-driven economy, he said.
“It is not as severe as it was,” Simon said. “But if the banks are not going to lend money, you can’t get the economy back in gear. What you have is people not spending enough money.”
The United States has struggled through periodic and painful downturns during its history, every time bouncing back.
But the Great Depression was so deep and broad that it sparked dramatic action to change the rules of the market.
Some of those changes — such as deposit insurance — make another Depression much less likely, many experts agree.
The current credit crunch may test the theory.
The late economist Hyman Minsky said capitalist systems tend to “constantly leverage up with more debt,” noted former Fed economist Tim Yeager, who was one of Minsky’s students and is now a finance professor at the University of Arkansas.
“Credit becomes weaker, loans become worse and worse and risk grows,” Yeager said. “It is like a Ponzi scheme.”
He hears echoes in today’s financial headlines.
“That is a good explanation of what happened this time. It’s a good explanation of what happened in the Great Depression.”
In popular memory, the stock market crash in the fall of 1929 triggered the Depression, although many experts say the crash was more symptom than spark.
Again this fall, the market has gyrated unnervingly.
“That is what everybody is looking at and that is about where the similarities end right now,” said Tom Smith, finance professor at Emory’s Goizueta Business School.
Even with the similarities, the stock market has a long way to go to match the Great Depression’s collapse. The Dow, an index of big company stocks, has lost roughly 40 percent in a year. In October 1929, stocks lost 40 percent in a month and would go on to lose almost 90 percent in three years.
Banks were a focus then as now, but for different reasons, Smith said.
“The 1930s was a failure of the banking system. What we had this time was a failure of banking practices.”
Those practices included creation of innovative securities meant to dilute the risk of bad loans. Instead, they spread financial poison around the world when the housing market stalled, as many of the securities were backed by mortgages.
Another difference: During the Depression, loans came mostly from small, virtually unregulated community banks. Government did not insure deposits, and banks could invest them any way they wanted.
As a sliding world economy ensnared the United States, millions of Americans saw their incomes drop. Passage of the Smoot-Hawley tariff exacerbated the problem by chilling trade. Many — especially in rural America — couldn’t make debt payments.
The need to get money often accelerated to a frenzied run on banks, which could not keep enough cash on hand to satisfy all depositors at once.
During the first 10 months of 1930, 744 banks failed, said Roger Cominsky, a Buffalo-based partner in Hiscock & Barclay’s Financial Institutions & Lending practice. By the end of the decade, 9,000 had gone under — nearly one in three.
In contrast, the community banks of the 21st century are relatively strong. But they do less of the nation’s lending. Instead, the economy depends on a handful of huge banks and other financial institutions.
Both eras came after economic “bubbles” that inflated many Americans’ wealth, at least on paper. In the ’20s it was stocks, and in this decade housing.
In both cases ownership was propelled by easy credit, easy terms and rules meant to encourage buyers to stretch beyond their ability to pay.
With stocks, it was “margin” buying — investors needed just a fraction of the price to make a purchase. A broker could issue a “call” that required the buyer to come up with more cash, but that was easy if prices had gone up. With homes it was a combination of public policy that encouraged easier credit, along with and lending and investing practices that fueled the binge. Consumers used refinancings or equity loans to fund other big purchases.
For both stocks and homes, the game could go on as long as prices kept rising.
During the early years of the Depression, about 40 percent of bank loans were secured with stocks, said Brian Olasov, managing director at McKenna Long & Aldridge, who consults with banks and has done extensive research on banking crises.
“Now, about six-tenths of bank portfolios are real estate-related.”
Despite similarities, most experts don’t think the 2008 crisis will lead to a full replay of the Depression.
But Yeager, the former Fed economist, said the worst may still be to come.
“There is a big storm brewing.”
A TALE OF TWO ERASSo far, the pain of the 2008 market crisis is milder than in 1929 — and far milder than it was by 1932.
| Fall 1929 | Fall 1932 | Fall 2008 | |
| Dow loss | 44% | 88% | 15% (so far) |
| Unemployment | 3.2% | 24% | 6.1% |
| Bank failures, year to date | About 1,000 | N/A | 15 |
| Size of U.S. economy | $103.6 billion | $58.7 billion | $14.3 trillion |
Sources: Bureau of labor Statistics, Econ Review, Federal Deposit Insurance Corp., Bureau of Economic Analysis
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Comments
By galois
Oct 23, 2008 10:25 AM | Link to this
The article is , to a large degree , accurate and reasoned. What is astonishing is the pathetic lack of knowledge in both elemental economics and history by the right wing nut cases who commented previously. The social and economic forces in play in consumption driven economies cannot be ignored. I suggest basic courses in economics and 20th Century US History. Pay close attention to the years following Wilson through the end of WW II. Also,
for leaders to encourage the public to spend their way into debt for the purpose of feeding the economy is irresponsible. EVERYONE is to blame in this regard.
By JJ the Jet Plane
Oct 23, 2008 2:53 AM | Link to this
That's right, AJC! Keep reporting on the negative CRAP that MIGHT happen! That really inspires concumer confidence. I don't care what the questions are and mor importantly, I don't care what the EXPERTS answers are. YOU have a civic DUTY to encourage and lift up your reading community. Want to know why your readership is down? Because you never report anything good. There IS plenty of GOOD NEWS!
Bill SHivar
By Media Hype
Oct 22, 2008 12:30 PM | Link to this
Once again, an example of irresponsible media reporting. Can you spell "OPPORTUNITY"? While many citizens are running scared by such media blitzes, many others are taking the opportunity to BUY while prices are low. Negativity is helping drive down the market as well.
By Bob
Oct 22, 2008 12:28 PM | Link to this
If we have a depression it will be because of a socialist President and a Democrat Party constrolled Congress.
By PDA
Oct 22, 2008 9:37 AM | Link to this
Democrats claim that a vote for McCain is a vote for a third Bush term... I disagree. John McCain is a proven, know commodity and national hero as opposed to George W. Bush who got elected because of his fathers connections.
I believe a vote for Obama is a vote for a second Carter term... I can remember 11% mortgages, 10% unemployment, a weak defense, Iranian Hostages impotence, cancellation of B-1 bomber program, proposed legalization of drugs, massive decline of moral standards, long gas lines and rationing, blame Israel for all the problems of the middle east, higher taxes, more foreign aid, abandonment of NASA and space exploration, banning guns and limiting the rights of gun owners, media censorship, the "fairness doctrine" applied once again to the free press and media, more and more government regulation, restrictions on imports/exports, isolationism and higher tarrifs on trade.
As a professional audio engineer here in Atlanta I have had the opportunity to assemble and operate sound systems Mr. Carter has spoken on many times. Every time I have be in the same room with the man and listen to him speak the hair on the back of my neck stands up straight. Jimmy Carter may be a former POTUS but in my opinion he is wrong on just about every single issue he speaks about. Especially when it comes to politics of the Middle East and America's role and responsibility as a leading global economic and military power.
Others may differ with my opinion and that is certainly their right to do so however I would ask that the insults, name calling, cursing (spelled with incorrect grammer), and threats & incites to violence cease on these ajc.com blogs. This is a public forum designed for users to communicate like adults. Please stop kicking sand in the box and post like a grown up. Thank you.
This especially means you - Republicans R Crooks
Your language and behavior the past few days is inexcusable. You should be ashamed of yourself. Would your mother or grandmother approve of your behavior? I truly doubt it.
Please feel free to post your thoughts. This is America and we all have the freedom of self expression and the right of assembly. We welcome your comments and opinions as long as they conform to reasonable standards of speech and behavior as listed in the user guidelines on ajc.com.
By BoinYogi
Oct 22, 2008 8:53 AM | Link to this
Its called "VooDoo Economics," as the "great" (Ha-Ha) Ronald Reagan coined the term.
"And to help us, we are going to get a new economic stimulus check that will increase the national debt, yet somehow solve a problem caused by too much debt?"
Unfortunately, Ronny doesn't get to see the end result. What happens when the rest of the world stops lending you money because you are so over-extended?
At the end of all of this, American must learn than in order to "make" money, one must convert a natural resource into a good. We stopped doing this in this country. We shut our factories down. Then, we spent the wealth accumulated from our ancestors to buy goods manufacured in other lands. Now, we borrow on our ancestors credit, to continue to buy these goods. But, our credit has run out...
By rene
Oct 22, 2008 8:41 AM | Link to this
I agree that this needs all needs to play out and rid the the banking/finance/credit card industry of the rats that caused this mess. The US govt must enact stronger policies to control these industries to try to prevent the perverse greed that drove us to the brink. Once this is over, hopefully, in a couple of quarters, the US will be stronger than ever. We must get back to manufacturing and being a global player instead of just a global consumer.
By Larry
Oct 22, 2008 8:18 AM | Link to this
"What you have is people not spending enough money"
Good grief! Its this kind of idiotic thinking that got us into this shape to begin with!
By Dennis Freeman
Oct 22, 2008 7:58 AM | Link to this
Note economist Simon beginning a theme that is gathering momentum: "What you have is people not spending enough money.ý In other words, the proper response to any financial crisis: go shopping! That's what Bush told us after 9/11, that's what we are being told now: shop your way out of the recession. And to help us, we are going to get a new economic stimulus check that will increase the national debt, yet somehow solve a problem caused by too much debt? Which of our politicians will stand up and say "this is stupid!" ? Counter-intuitively, I'd say Obama is our best hope. McCain will just go along with whatever he is told, just like he did on the bailout.
By Lulu
Oct 22, 2008 2:37 AM | Link to this
I agree with Yeager. The worst is yet to come. My only inconvenience so far is that I need new underwear and my usual source is out of stock until 11/1. It will take them that long to be able to pay for their usual supply because they can't get credit from their manufacturer in China. Here's a thought. Open your own wholesale supplier. Everything I've bought from China is pure crap.
And yes, the Carter economy was a disaster. Did he think when running for reelection we wouldn't notice that 21+ interest rate?
I lived through the latter part of the great depression and believe me SO FAR this isn't anything like it. The most disgusting part is that I had a CD mature this summer and when it did my banker tried to sell me an AIG (the corp we just bailed out)CD. When I declined because it wasn't FDIC insured he assured me that it and all other such monetary products were in the end backed by the US government. I looked at him dumbstruck. Such flagrant arrogance that the US would bail out AIG and the other Wall St felons was appaling BUT TRUE... apparently.
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