How Is This Depression Different from the Great Depression?
There, I said it. We are in a depression. Not a recession but a depression. We haven’t yet hit the textbook definition of a “depression”: a fall of GDP by 10% over three years along with a 10% unemployment rate. But we are fast approaching the official definition.
And let’s be honest…it sure FEELS like a depression.
Take a look at this index of the stock market compared to the great bear markets of the post-tech bubble burst, the oil crisis of 1973-75 and the Great Depression; note that the 1929-32 drop is the Dow and the others are the S&P 500.
Yes, the market is actually in WORSE shape now compared to the great sell-off from 1929-1932. The market has lost 56.4% of its value from its peak. In the Great Depression the Dow lost 89.2% of its value before rebounding between 1933 and 1937. It faced another drop-off in 1937-38 and then headed back up again with Lend Lease and the build-up for World War II (which was, to a large extent, a massive New Deal jobs program).
There are other ominous similarities to the Great Depression. First and foremost is housing and banking. What many people don’t realize is that the the modern amortized mortgage was actually a creation of the Federal Housing Act of 1934. Along with insurance for saving and loans under FSLIC, the new FHA helped spur massive construction in home building and made it possible for millions of Americans to own homes for the first time. Prior to the Housing Act, most mortgages lasted amortized in about 3 to 5 years and required a 60% down payment. As you can imagine, home ownership was fairly restricted. Still, the collapse in the banking sector and rise in unemployment to 25% by 1932 meant that foreclosures reached an all-time high. These foreclosures, in addition to speculative losses on Wall Street and a spate of bank runs, utterly decimated the banking system.
We all know the role of the housing issue in causing the current depression: sub-prime loans fed a housing bubble that burst, carrying down with it a global financial system buttressed by securitized sub-prime loans. The resulting credit crisis destroyed many financial institutions and led to a more generalized economic downturn. The secondary downturn is actually far more damaging to the housing crisis as people with prime mortgages are losing their jobs and an ability to pay their mortgages.
The collapse in retail spending is another similarity to the Great Depression. The 1920s witnessed the beginning of the “installment plan” – the forerunner to the modern credit card, which allowed millions of middle class Americans to afford all sorts of new consumer goods like vacuum cleaners, automobiles and washing machines. Like the last few decades, the 1920s boom was more illusory than real, and was based mostly on leverage. (Yes, there were real advances in productivity and technology, but not nearly as much as the equities market suggested).
So does that mean this depression is the same as the Great Depression? No. There are three key differences. Two that make the Great Depression far worse and one that makes this one worse.
The Great Depression was made worse by an underlying agricultural crisis that had its roots in the over-planting of the post-Civil War era. Farm prices started dropping in the 1870s and, with a brief exception of World War One, never really recovered. By the early 1920s the roughly half of Americans living in the countryside faced an economic depression. Quite simply, farmers could not sell the goods they were producing. Interestingly, the vast majority of the banks to fail in the Great Depression were rural banks. The Roosevelt Administration’s Agricultural Adjustment Act established the modern farm subsidy regime and encouraged the mechanization of agriculture. Basically, it told the poor sharecroppers and tenant farmers to move to town and it paid the remaining big farmers a lot of money to buy mechanical cotton-pickers and combine tractors.
Needless to say, we don’t suffer from the same sort of agricultural crisis in America. Food stores are still filled with fresh items as mechanized and commercialized farms still deliver necessities to our kitchens with ease and efficiency.
Another key difference is the unemployment rate. The reason earlier recessions this century (not to mention the Great Depression) had such high unemployment rates is that manufacturing tends to employ – and shed – a ton of jobs according to business cycles. An ironic effect of outsourcing over the last few decades is that the job losses stemming from our drop in consumption are being felt in China primarily. Obviously, that was not the case in the 1930s.
But, on another level, the current depression is worse. Why? Because the modern financial system is far more globally connected. Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke could develop the most ingenious banking plan tomorrow and it would still have only limited effect on the global depression because the Europeans can’t get their act together and the Chinese are focusing inwardly on their own depression. There needs to be much more financial coordination between treasury secretaries to unwind global credit default swaps and other bogus means of “insurance” that leveraged all the great “economic miracles” of Ireland, Eastern Europe and elsewhere.
Suffice it to say: if a major bank like Citigroup or a massive manufacturing company like GM goes bankrupt, you’ll hear a lot more people speak of this as the Second Great Depression. Right now, nobody wants to go there.
But I think it’s important to reckon with the great monster that we’ve created over the last few decades. The global capitalist system is in great peril right now. And it is not the so-called “socialists” that are threatening it.