THIS WAS NEVER EVEN CLOSE TO GREAT DEPRESSION 2
1 September 2009 by TPC
14 Comments
Many investors have been quick to compare the current credit crisis to the Great Depression. Many of these same investors have praised Ben Bernanke for his swift actions in staving off a second Great Depression. Unfortunately for those in both camps this was never even close to becoming a second Great Depression as I repeatedly stated last Fall. The following data from the SF Fed shows just how different the two periods are and why the comparisons are just plain silly. Of course, this doesn’t mean we aren’t in the worst economic crisis since WW2 (which we certainly are), but comparing the current downturn to the Great Depression is like comparing apples and oranges:
More on this topic
(What's this?)
Guest Post: Greenspan Says Worst Financial Crisis EVER, INCLUDING the Great Depression
(naked capitalism, 2/23/10)
Elizabeth Warren Explains (Part of) the Financial Crisis So even 3rd Graders Can Understand
(Fund my Mutual Fund, 2/2/10)
The U.S. opts for the bailout hustle over the Swedish banking crisis response
(naked capitalism, 2/22/10)
Seth Klarman's Investment Lessons From the Financial Crisis
(market folly, 3/5/10)
Let’s compare those figures in 3 to 4 years, and than we’ll know.
This is far from being over.
Unemployment is much higher than 9.4%, According to Atlanta Fed Chief Dennis Lockhart the real unemployment rate is 16% and is increasing.
Americans fell behind on their mortgage payments at a record pace in the second quarter.
Regarding bank failures in the Great Depression you have to remember there was no FDIC insurance so bank runs were quite common which lead to many bank failures.
The amount of debt to GDP is significantly greater than it was in the Great Depression and its going to a long time to unwind:
http://www.nakedcapitalism.com/2008/07/has-deleveraging-even-begun-not-for.html
We’re only a year or two into this crisis depending upon when you consider it started and its going to take a long time to unwind. Kevin Depew has some very good articles about the Great Depression:
http://www.minyanville.com/articles/index.php?a=18055
Someone once said this about the Great Depression, “Just when we thought it was over, it was really only beginning.” And that’s probably true today with all this nonsense about “green shoots”!
I agree with ikoli, lets compare those figures in 3 or 4 more years!
PS – I tried including additional links to support my statements, but I was accused of being a spammer.
Most spam protection won’t allow more than 3 links.
Good point about unemployment percolator. Also, the stock market decline at the trough was 57%. Not sure where they get 48%.
It took a few years to get to the depths of the great depression so the comparison is a little premature.
I have to admit that I think that this crisis is still in its early stages and not over as everyone else seems to think.
The policy response has been much more effective in the early stage of this crisis than it was in the Great Depression, but the credit bubble is much bigger this time around. We have yet to see the real economic crisis, so far we have just seen a severe swift credit crisis that seems to have caught everyone by surprise. The swiftness of the crisis, both the collapse and tentitive recovery, is the most surprising thing.
I think it is far too early to make comparisons to the Great Depression. The Fed might end up eating its words sometime in the future, as it has through much of the current episode.
One final comment.
TPC said, “[B]ut comparing the current downturn to the Great Depression is like comparing apples and oranges”
The numbers you posted were from the peak of the Great Depression and are comparing them to figures at the beginning of this one.
Click on the link below and read the article which has some great charts tracking the two economic contractions at the same points in time, you might re-think your apples to oranges comparison:
http://www.voxeu.org/index.php?q=node/3421
From the article “To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.”
in effect to date, tpc, we’re clearly not experiencing 1932 just yet. but i do think that comparisons are valid — not on results to date, but on initial conditions and process.
as then, we had large current account imbalances perpetuated over time across currencies (then to finance ww1 and its aftermath, now as a result of both closing the gold window and then managing/pegging currencies to the dollar for mercantilist purposes), which fostered a massive private sector leverage bubble. as then, the rise of debt increased economic inequality, concentrating wealth in the financial sector. as then, an inevitable fit of minsky instability burst the bubble. as then, balance sheet repair has since increasingly become the primary prerogative as a result.
the obvious difference is in the government response — though more as a matter of scale than type, i’d argue. hoover’s fed also went into the market to discount private bills and expand its balance sheet; hoover’s administration also administered fiscal stimulus. i think we can conclude that these efforts, then and now, have positive if transient effect — one has only to look at ireland to see what the absence of both looks like.
but the outcome is still far from knowable. the same process is at work from even more severe initial conditions. the results could be as catastrophic, indeed have been globally in the early innings. the big question is whether fiscal and monetary public policy can counteract the great private deleveraging. the success of public “counterleveraging” is imperative, but i don’t think anyone knows if it can work or if the results will be desirable.
I have to disagree. The GD was compounded in large part because there were no safeguards to protect from bank runs. This compounded the fears, the losses in the stock market and the job losses. Not to mention that we were a fairly young economy when the GD occurred. Our corporations are much stronger, more established today. Plus, there are numerous safeguards that protect us from GD 2.
I am not saying things aren’t bad, but they will never get as bad as the GD.
some good points as usual, but i disagree in part, tpc, which is rare!
the runs of the 1930s were an issue for public confidence, to be sure, but really counted little in the macro picture of money supply. the amount of money destroyed in bank runs was simply not large enough, particularly in comparison to the overall contraction of money supply, to be a significant issue. a third of banks failed, but most were one-branch operations. many banks which closed during the correspondent crisis of late 1930 reopened; it wasn’t until late 1931 that banks were being liquidated en masse, and that was two years following the asset crash and deep into the economic contraction.
by far the larger effect was the contraction of economic activity and the resulting effect on incomes, particularly, which become deposits. the idea that bank runs caused monetary aggregates to collapse is something of a canard, as i read it. which is why japan, which to my knowledge hasn’t seen a major failed bank throughout its long delevering, experienced an enduring deflation anyway. had it refused to fiscally stimulate and inject government-deficit-derived spending into the system to sustain incomes and deposits, it would likely have experienced a 1930s rerun even without allowing banks to fail.
what’s more, i’d argue we have indeed experienced a series of massive bank runs — just not among many depository institutions. what’s gone on in the shadow banks has had more or less the same effect on money supply.
but what we do have is a much larger government sector and a much greater willingness to lever the public balance sheet. that’s helping for now and i hope will prevent a GD2 scenario. but i think we have to admit that the setup is very similar, and we just don’t know how bad things might get.
TPC, I guess we’ll have to agree to disagree.
Maybe things won’t get as bad, but the problem with all these “safeguards” is that its the taxpayer that is on the hook. So instead of a complete washout to cleanse the system these “safeguards” will just draw out the process making it worse in the long run, i.e. instead of 10 years of “horrible” economic numbers we get 20 years of just “bad” economic numbers, like Japan.
I’d also argue that we benefited from being a young nation during the GD, whereas today we’re an aging nation and those demographics are going to hurt economic growth going forward. Also remember the USA was a net creditor nation during the GD and today we’re a net debtor nation.
I’m keeping an open mind, just maybe our Government will initiate some good policies going forward, but I have my doubts. I’m sure there will be more taxpayer bailouts and ill conceived programs, like “Cash for Clunkers”, where productive assets are destroyed which is really no different than FDR plowing under crops and killing livestock.
You might want to read Murray Rothbard’s “America’s Great Depression” and you’ll see there are many more similarities than differences when comparing today to the 1930’s.
Great blog keep it up!
You guys all make great points. And yes, this has yet to play out. You know I am long-term bearish, but I just don’t see things ever getting as bad as they were back then. We could go back and forth all day, but agreeing to disagree is the way to go until we get further into this mess. Hopefully, for all of our sake, you guys are wrong.
You are comparing apples to oranges with your unemployment numbers. Try calculating today’s unemployment number the same way it was calculated in 1930. You will get an unemployment number today that is actually close to 20% if you do that. Apples to apples.
Hopefully, for all of our sake, you guys are wrong.
amen to that!
MARKET QUOTES
THIS WEEKS MOST POPULAR STORIES
MARKET NEWS
© 2009 pragcap.com · Login.
Home · Advertise · Contact us · Disclaimer ·