Comparison between the Great Depression and Now

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Submitted by Ex-SD on October 5, 2008 - 4:44pm

ENTIRE ARTICLE HERE: http://www.signonsandiego.com/news/busin...

Excerpts are worth reading......................

"Nevertheless, some of the similarities between 1929 and 2008 are eerie.

Not unlike today, the crash of 1929 was preceded by a decade of deregulation, cheap credit, housing bubbles, rising inflation, rampant stock market speculation, faltering employment, stagnant wages and a growing gap between the wealth of executives on Wall Street and the cash-strapped consumers on Main Street.

To jump-start the economy after a recession in 1920-21, the Federal Reserve slashed interest rates, similar to what then-Fed Chairman Alan Greenspan did following the recession of 2001.

Although wages for most workers were stagnant during the 1920s, Americans tried to keep pace with rising inflation by borrowing money. They used credit for such newfangled gadgets as cars, radios, refrigerators, washers, dryers and vacuum cleaners.

Lawrence Mishel, who heads the Economic Policy Institute, said that such overreliance on credit – similar to the recent reliance on credit cards and home equity loans – could not be sustained over the long run.

“You can't run an economy without having enough income for workers to spend on consumption,” Mishel said. “It's important to grow an economy the old-fashioned way: earning money, and then spending what you've earned.”

As in the recent past, the cheap credit in the 1920s led to a housing boom, fueled by five-year, balloon-payment mortgages. When the mortgages came due, the homeowners had the choice of paying the balance, refinancing, selling the property or going into default – similar to the choices facing adjustable-rate mortgage holders today.

Of course, as long as interest rates were low and real estate prices were going up, there was no reason to default. A mania for real estate developed, especially in Florida and Southern California.

In San Diego, for instance, the total value of building permits jumped 80 percent between 1920 and 1926. The supply of homes soon outstripped demand. In 1927, five times as many homes were built in San Diego as were sold. Home values dropped and construction faltered. Between 1927 and 1928, the value of building permits in San Diego plummeted 86 percent.

By 1929, homeowners could not keep up with their payments. Months before the stock market crashed, home-sale ads in The San Diego Union were full of phrases such as “price slashed,” “must sacrifice all,” “big reduction” and “must sell immediately.”

“Asking 60 percent of what property is worth,” a homeowner in Hillcrest wrote back then. “Any offer above 1/2 considered.”

By that point, the “smart money” of investors and speculators had left the housing market in favor of the stock market – a reverse of what happened this decade, when the smart money left the stock market after the dot-com crash of 2000-01 and started flooding the housing market.

The speculators were aided by the close ties between banks and Wall Street investment firms. When the home mortgage market was drying up, banks built a new line of business by lending money to stock investors.

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Using this borrowed cash, the speculators furiously bid up share prices. Between December 1927 and December 1928, the Dow Jones industrial average jumped 50 percent, from a record-breaking 200 points to an even more astounding 300 points. Money from foreign investors – mostly English and Canadians, instead of today's Chinese, Saudis and Japanese – flooded the market.

By early 1929, the skyrocketing prices caused a number of economists to worry that a bubble was forming in the stock market, fueled by credit. The Fed tried to choke off speculative trading by raising interest rates on the loans that investors used to buy stocks.

In late summer 1929, stock prices began to fall. Banks stopped lending to investors, jacked up interest rates to cover the risk and began calling in loans. This credit crunch accelerated the downturn on Wall Street, just like the current credit crunch, which is related to fears about the value of mortgage-backed securities.

Between September and October 1929, the market lost 40 percent of its value. The decline continued through 1933, when the Dow was 89 percent below its peak. Hundreds of companies went out of business. Others were forced to shed workers. Jittery bank customers, concerned about the safety of the financial system, cashed out their savings accounts, causing widespread bank failures.

With those runs on banks, which occurred months after the stock market collapsed, the Great Depression had begun.

Most economists doubt that the nation could see a repeat of that kind of economic collapse.

Most important, economists say, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have studied the Depression and are working to avoid its pitfalls. Bernanke's studies concluded that the Great Depression could have been blunted if the government had pumped more money into the financial system.

Bolstered by that belief, Bernanke and Paulson have adopted a much more activist stance than their counterparts did in the 1930s – pumping hundreds of billions of dollars into the market, bailing out failing financial firms and keeping interest rates low to ward off a credit crunch.

Ross Starr, an economist at the University of California San Diego who knew Bernanke during his days at Stanford in the 1980s, said that if the Fed had not taken the type of action it has in recent months, “you would be faced with a lot of businesses going under and a rise in bankruptcies, since capital could not be mobilized to help the economy.”

Under a best-case scenario, Starr said, the economy may be in a recession that lasts through the end of this year or the beginning of 2009. “If we're lucky, that's all we'll get,” he said. “But if we're unlucky, it will probably be the worst thing we've seen since the 1940s.”

Submitted by Arraya on October 5, 2008 - 4:53pm.

"From now on, depressions will be scientifically created." -- Congressman Charles A. Lindbergh Sr. , 1913

Submitted by patientrenter on October 5, 2008 - 5:30pm.

I think there is a real difference between the time of the Great Depression and now. Amongst our nation's economic and political leaders, there is little reluctance to print and spend more money, in huge amounts if necessary, in response to recession. Back in the early 1930's, many were reluctant.

Ultimately, we need real changes that cannot be avoided:

1) Greater US resources devoted to producing goods and services that the rest of the world wants.

2) Lower US consumption of foreign goods and greater US savings rates

But we can certainly avoid, by printing and spending money, large-scale unemployment and GDP declines as in the Great Depression. The people employed may be digging and filling holes in the ground, producing little or no real economic value, but they will be "employed" and the GDP will appear to be higher as a result than it would otherwise be. (It won't really be, of course.) It might well lead to more real economic waste, because it will give less incentive for people to get any job they can in export or import-substitute activities, but politically-driven intervention is like a tax on the real economy, and we will have to pay some of that tax one way or another.

Submitted by peterb on October 5, 2008 - 5:54pm.

Some economic historians think this is more like the crash of 1873 or 1825...or even 1907. Those were huge credit bubble burst. But all basically depressions.

Submitted by HarryBosch on October 5, 2008 - 8:17pm.

During the Great Depression unemployment was nearly 25%.

Today we're only at 6.1% - let's hope it doesn't rise any further.
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Amity Shlaes, author of a new history of the Great Depression, talks about Franklin D. Roosevelt's baleful economic legacy, the growth of government, and the death of classical liberalism.

Shlaes shows how both Hoover and Roosevelt “overestimated the value of government planning” and intensified and prolonged the very problems they were seeking to fix.

http://www.reason.com/news/show/123476.html

In her meticulously researched new history of the Depression, The Forgotten Man (HarperCollins), journalist Amity Shlaes describes the received catechism of the era: “Roosevelt made things better by taking charge. His New Deal inspired and tided the country over. In this way, the country fended off revolution of the sort bringing down Europe. Without the New Deal, we would all have been lost.…The attitude is that the New Deal is the best model we have for what government must do for weak members of society, in both times of crises and times of stability.” But that conventional account, she writes, fails to capture “the realities of the period.” Shlaes shows how both Hoover and Roosevelt “overestimated the value of government planning” and intensified and prolonged the very problems they were seeking to fix.

Submitted by 4plexowner on October 5, 2008 - 8:17pm.

Read about Kondratieff Winter and Elliot Wave Cycles

In Kondratieff terms we are headed into the Winter cycle with a bottom sometime in the 2012-15 timeframe (K Winter wipes out all the bad investments made during the previous economic boom)

In Elliot Wave terms we are headed into an economic correction that is ONE CYCLE LARGER than the cycle that was corrected by the Great Depression of the 1930s

ie, in EW terms, we are headed into an economic downturn that will be significantly WORSE than the 1930s

~

I'm just a whacko nutjob so take what I say with a grain of salt ...

Submitted by stockstradr on October 5, 2008 - 8:33pm.

I'm just a whacko nutjob so take what I say with a grain of salt ...

Maybe, maybe not.

I think about our economic predicament in terms of consumer spending, upon which about 70% of our GDP rests.

So I ask myself hypothetical common sense question: "How much will typical American reduce their spending? 5%? 10%? 20%? 30%?"

I think it is very possible Americans will reduce their spending on average by over 15%, maybe even over 20%. So clearly we are looking at some quarters ahead with GDP declining.

Sales of cars and light trucks fell 27% last month, reached a 15-year low, according to Autodata Corp. Even Toyota was down 32%.

If that data is at all representative of how consumers are cutting back spending, we've got a severe recession or depression coming our way.

Submitted by 4plexowner on October 5, 2008 - 8:39pm.

Two signs of economic trouble:

1. Starbucks closes 600 stores

2. Toyota sales down 32%

~

Toyota vehicles are THE BOMB - check Consumer Reports on this brand if you aren't familiar with their track record

When Toyota sales drop 32% we are definitely in economic hard times

Next time you need a vehicle to drive for 300,000 miles or so buy a Toyota - if you like rickety POS' continue to buy other brands (alright, I drive a BMW because it is a SPORTS car and looks swoop-ey - the truck I'm about to buy will be a Toyota)

Submitted by Ex-SD on October 6, 2008 - 3:57am.

Harry, I believe that unemployment will rise somewhere between 20%-25% before this is all over. Of course, the government is going to be throwing a lot of money at variety of ways to fix the problem..............primarily, they will probably wind up making a deal with just about everyone who has a mortgage where the house is worth less than what they owe. Example: I suspect that the Federal Government will wind up determining what the median price should be for all houses in all areas and write down the mortgages to that amount and rebate a portion of the difference to the banks. This would stop housing prices from falling and stabilize the housing market. I can see the idiots in Washington doing this within the next two years (and I hope I'm wrong).

Submitted by cr on October 6, 2008 - 12:28pm.

Our Government will print us out of this mess and into another, longer, period probably of high inflation.

But at that point it will still be better to have devauled dollars than none at all.

The solution to all of this eventually will be a difficult combination of raised rates, and job creation.

Submitted by donaldduckmoore on October 8, 2008 - 12:48pm.

I am just waiting for this day to come, Ex-SD.

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