A depression: Could a third of Americans be right?
By Mark Trumbull | 10.01.08
The ongoing credit crisis raised fresh worries about an old problem – a 1930s kind of problem.
Yes, the D-word.
Most forecasters say an economic depression remains a highly unlikely scenario.
But many also say that the risk is real – because of the possible collapse of credit markets.
At the very least, it seems as if fear and the search for historical reference points are causing a refresher course in lessons from nearly 80 years ago.
Consider this: The words “depression” and “economy” coincided in 1,235 articles in major US newspapers last month, according to the Nexis database service. That compares with 228 times in September 2007. In a new USA Today/Gallup poll, one-third of Americans defined the current state of the economy as a depression, not a recession.
The economic news certainly isn’t buoying anyone’s spirits. Major automakers reported Wednesday double-digit declines in car sales for last month. The same day, the Institute for Supply Management reported a large drop in new orders for September, suggesting a continuing slowdown in manufacturing.
Still, concern about the direst outcomes is still hypothetical, not reality. On Friday, the Labor Department will release unemployment figures that are expected to show the continued erosion of jobs. But at 6 percent, unemployment is far below the devastating 25 percent rate seen in the Great Depression’s low point.
On its website, the National Bureau of Economic Research refers to depression as “a recession that is major in both scale and duration.” So what’s a recession? “A period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”
The big risk right now, economists say, is that a credit crunch causes major shifts in behavior – where employers can’t get loans needed to create new jobs, consumers can’t get loans for major purchases, and soon lots of people are losing jobs as everyone hunkers down. Asset prices for things like homes could keep falling, if few are able or willing to be buyers.
That risk is offset by a reason for optimism: Nobody wants to repeat the 1930s, and policymakers have learned some lessons from that era.
In his life before becoming Federal Reserve chairman, Ben Bernanke’s academic research focused heavily on the Great Depression. In one important paper, he argued that a breakdown in the credit system “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.”
To the degree that that risk is present today, the process of purging bad debts and reviving channels of credit is vital to the economy. That’s why there’s all the talk about a rescue package in Washington – not for bankers personally but for the system.
Another lesson of the Depression is this: Policymakers responding to a crisis can sometimes create new problems if they send mixed signals – engendering confusion or hesitation among the marketplace participants on whom the economy ultimately depends.
These are just a couple of lessons from the past – ones worth remembering in the heat of fast-paced current news.
<< While Congress debates, FDIC steps to fore of credit crisis | MainComments
2. George Robertson | 10.01.08
I don’t think this is going to be a Depression, but I think this downturn will wind up being as bad for professional people and construction workers as the early 1980s were for factory workers and the mid 1980s were for petroleum workers.
3. Brother, can you spare a dime? | 10.02.08
The $700 Billion Bailout or “Rescue” will only be good for a year. After that the bottom falls out. It will take one or two more years to hit the floor.
The recent $168 billion dollar rebates sent to consumers felt good to them for about three months — and it barely had an impact at all on the dying economy. Wall Street and the banking system needs a hundred times more, but they don’t deserve it because they will use it to extricate themselves from their “poor” positions as they repatriate to their Rivieras.
4. James Boyd | 10.02.08
It is time for wall street to be held acountable for there actions! What incentive do they have not to do this again?
5. BM | 10.02.08
Excellent article - concise, correct (to the point) without throwing around financial jargons for the great bankers and analysts to understand.
6. Dennis Webb | 10.02.08
This bailout is for the hedge fund traders. There are between 45-64 trillion dollarsof CDO’s, SIV’s CDS’s. No one outside a handful of mathmaticians even know how or what these these things do. The bundled mortgages made it possible for hedge fund traders to generate these investment vehicles. The worthless mortgages underlie these instruments. If those mortgages aren’t somehow tradeable the CDO’s, SIV’s and CDS’s become worthless. Imagine the giant sucking sound as 45-64 trillion dollars of ones and zeroes disappear from the world banking system. That’s why congress is scared, but they’re still not telling the truth. This is an attempted bailout of the hedge fund industry, nothing more, nothing less.
7. David Hazen | 10.02.08
A crisis in credit is a crisis of credibility. The attempt to restore confidence is a con job. If we had no Iraq war costing us directly and indirectly in the multi-trillions of dollars, we could bail ourselves out several times over and have no need to do so, anyway. We are at war with ourselves, we are deathly ill with interpersonal and systemic violence inflicted on ourselves. Our vain attempts to be secure have left us exhausted, empty of resources, and questioning. The time is ripe for genuine weeping, empathy for ourselves and others, and a radical shift in our strategies for achieving security, health, and growth. Rugged individualism has lost its virtue. Compassionate community is the more believable, trustworthy focus of our efforts.
8. Brian | 10.02.08
Are you ready for the depression now? I am. Stop delaying the inevitable Washington, lets hit the floor now before we cripple our nation further. They gave us war, they gave us rebates, they’ll even pat your baby’s head… but it doesn’t matter how they feed us this junk, what goes up must come down.
9. D. DURAN | 10.02.08
James…..that’s like asking: How do you stop “Greed”. I’ve always thought
of Wall Street as a hogpen, filled with larceny, lust, unbridled desire of self, wealth, power and all material things. Ask yourself why CEO’s would pay themselves hundreds of millions of dollars in Salary and millions of dollars in severance pay. They rightly view us as the biggest fools on earth because we have senators and congressmen leading us into bailing them out of having to give that money back. And we’ll do this again in the future if history is any guide.
10. Benjamin Chernivsky | 10.02.08
The plan is not to bail out the individuals, but to keep the economy floating, which Mark makes quite clear:
“That’s why there’s all the talk about a rescue package in Washington – not for bankers personally but for the system.”
When the banks sink, the economy sinks, which is exactly what happened with the 1929 depression. Banks were told to take a day off and lots of them just kept close.
James, what incentive do they have not to do this again? Look at the front page headlines printed since the day this began. The individuals that caused this will certainly have their own personal issues to deal with.
We, the people, the well-informed people, will not allow such calamity to happen again.
11. Dude Dude Dude | 10.03.08
“We, the people, the well-informed people, will not allow such calamity to happen again.”
- Benjamin Chernivsky
HAHHAHAHHAHAHA
12. Bill Montgomery | 10.04.08
What this means is the Bull has grazed on our tax money and now after a small passage of time the other end of the Bull will go to work!
13. John Lennon | 10.05.08
The US is heading to a major meltdown crisis. The people will start rioting on the streets as they have been duped by the politicians on the 700B package. The answer that Paulson and the greedy bankster politicians have put together will fail as it does not address the basic issues in relation to the economy. The cash crunch and credit freeze is the making of the government so that the people will accept the lies that has been presented by Paulson. The time has come for the people to wake up and take charge of the situation. All this is happening is because the American electorate is basically immature to politics and do not see the real picture as to the lack of understanding of governance and the political structure of the USA. Your country is owned by the few and you are the sheep being fed for the ultimate sacriface and eventual slaughter. Please wake up and realise what is happening…stop watching NBC, CNN and ABC as they tell you more lies and due to your poor knowledge of your own political strcture, you are unable to seperate the truth from the many lies being told by the main stream media…WAKE UP YOU AMERICAN BEFORE YOU LOSE YOUR COUNTRY AND YOUR SOULS TO THIS TERRIBLE CABAL OF CROOKS. I emphatise with you all. GET UP STAND UP STAND UP FOR YOUR RIGHTS..GET UP STAND UP DONT GIVE UP THE FIGHT….Bob Marley..
14. Jeff | 10.06.08
It is truly a global economy now….
Banks are failing in Europe/Asia/Russia
and I think it is– and has been a depression, though the economies are so much larger now than in the 30’s.
CAN the whole system collapse ?? It sure can… though it may take longer than it previously did. Things are ugly out there.
I said last year to a friend that the hottest job in the US was going to be a sidewalk sweeper on Wall Street– when all those grey suits start hitting the ground.
15. Craig | 10.06.08
the only way we go into a depression is if we PANIC–which is exactly what most of the postings on this blog are advocating. During the depression of the 30’s–unemployment was at 25%–we are currently at 6%–not even close. Smart investors will buy up undervalued stocks and will make huge windfalls 3-4 years down the road. our energy crisis will in fact be our road out. Homegrown energy sources will create jobs and expand the economy just as industry and technology has done in the past.our economy will come back–it always has.
16. Santa Clara Mike | 10.07.08
The writer needs to remember the way of counting the unemployment numbers has changed from the 1930’s. Now, when you have exhausted your benefits you are no longer counted. You are considered “no longer in the workforce” i.e. retired.
This is the reason our unemployment rates are lower than Europe. A much better measure is the us payroll number. It’s off millions of jobs since 2001
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1. Tristan | 10.01.08
Okay its obvious. the government and high elite rungs have been actually railing the american people for years now and the media has been silencing and manipulating the american people. And this 700b Bailout package is an attempt to stop overdue deflation and keep that money where it is… in their pockets… so they dont have to sell their yachts and handle the natural consequences of bad investments.