Dispelling depression myths

[Canadian Grunt]

There are many references to the depression on the forum lately.

I just want to highlight some fundamental differences between the depression and today’s market.

1. During the depression over 9,000 banks failed. Only a few have failed so far and no personal assets (savings were lost).

2. Government miscues during the depression included tariffs, which caused a trade war with Europe.

3. The US government increased interest rates and taxes at the worst possible time (at the start of the Depression).

4. There was a weak social network, no unemployment insurance, SS, regulations for laid off workers.

5. There was 25% unemployment at the height, today around 6% unemployment.

6. There was lax market regulation and uncoordinated international markets.

7. There are more differences but I got tired of listing them.


Japanese recession:

There are many problems for Japan during their ongoing recession during the 90's. Of note, the Japanese too long to impose bank reform.

Most importantly, for some reason, even today, around 40% of Japanese store their money at home. They are ultra conservative and risk adverse. I don’t believe their problems will be indicative of this recession.


We may endure a longish recession; however, the markets will rebound.



What do you all think?

 

[FinanceDude]

I think if Glass-Steagal was still in effect, most of this would not have happened......

 

[brewer12345]

I think you are about right. I expect a recession of at least 6 months duration, but it is hard to tell how long it will really last. Right now the forward market has the bulk of the unfreezing in the credit markets priced in to have happened by March '09 and a fair bit even by the end of 2008. If that happens in a reasonably speedy and orderly fashion, it will go a long way toward mitigating the deleterious effects already visited upon the economy by the freeze.

 

[ziggy29]

I think a combination of bad legislation and tight monetary policy put the vise on the economy in the early 1930s. The money supply was allowed to contract and interest rates were hiked. Both of these were huge contributing factors to making it a lot worse, and we don't seem to be repeating that mistake with monetary policy.

 

[audreyh1]

I think if Glass-Steagal was still in effect, most of this would not have happened......

Can you expound on this? I know that Glass-Steagal required that brokerage be kept separate (separate company) from traditional (FDIC insured customer deposit) banking, but I don't know how removing that restriction contributed to the current mess.

Audrey

 

[audreyh1]

1. We are not at the "height" of whatever outcome is coming our way, so you can't compare today's stats with the "height" of the Great Depression. And remember, it is called "The Great" - there had been numerous other depressions prior.

2. The Fed/Treasury and central bankers around the globe have taken extraordinary steps to avoid the worst-case (depression) scenario. You can't wait until we have depression-era stats to take action.

Audrey

 

[Gardnr]

Can you expound on this? I know that Glass-Steagal required that brokerage be kept separate (separate company) from traditional (FDIC insured customer deposit) banking, but I don't know how removing that restriction contributed to the current mess.

Audrey

You don't have him on ignore yet? Literal or figurative.

 

[Bestwifeever]

1...remember, it is called "The Great" - there had been numerous other depressions prior.
Audrey

Totally off the topic, I have to say I didn't even think of the Great Depression when I saw this thread title--I thought since everyone is feeling a little depressed these days that this would be some helpful advice on determining if one is clinically depressed (to clarify those myths about depression), as here:

Depression Myths Quiz

so hey, at least the economy had slipped my mind for a few minutes.

 

[Frugality_of_Apathy]

Totally off the topic, I have to say I didn't even think of the Great Depression when I saw this thread title--I thought since everyone is feeling a little depressed these days that this would be some helpful advice on determining if one is clinically depressed (to clarify those myths about depression), as here:

Depression Myths Quiz

so hey, at least the economy had slipped my mind for a few minutes.

Forgetfulness is a sign of depression.

 

[Texarkandy]

We live in a very different world today than in the 1920's & 30's. I have an idea comparing current economic conditions to the "depression" of the thirties is kind of apples and oranges. I wonder if it's really correct to draw direct parallels and if the only thing that's really the same is that "things are bad".

You asked so I'll just make some observations off the top of my head.

There are many references to the depression on the forum lately.

I just want to highlight some fundamental differences between the depression and today’s market.

1. During the depression over 9,000 banks failed. Only a few have failed so far and no personal assets (savings were lost).

Did as many regular citizens have as much money in the bank then? Who keeps most of their assets in traditional banks nowadays? (those of us who have any!)

2. Government miscues during the depression included tariffs, which caused a trade war with Europe.

What's going on with China trade today. What was the comparable "middle eastern oil" issue of the 1930's? Outsourcing? Jobs going overseas?

3. The US government increased interest rates and taxes at the worst possible time (at the start of the Depression).

If this is the start of our "depression" - will the next president raise taxes on businesses? Will interest rates go up because institutions will now view consumers as riskier borrowers than in the past?

4. There was a weak social network, no unemployment insurance, SS, regulations for laid off workers.

There was a much stronger family network in those days for people to fall back on. In our transient society nowadays, how many no longer live around family?

5. There was 25% unemployment at the height, today around 6% unemployment.

The employment scene was very different then. Many more agricultural and factory workers. Were there as many women in the work force full-time as now?

What is the impact of the presence of 10 to 20 million undocumented Mexican citizens who have decided to reside permanently in our midst a factor in a severe economic downturn - and what will be the impact of a severe economic downturn on them?

6. There was lax market regulation and uncoordinated international markets.
...............

The markets were smaller, less complicated, and there were fewer players.

 

[lazygood4nothinbum]

You don't have him on ignore yet? Literal or figurative.

what the hell was that?

anyway, as to the rest of this thread, i hope yer right. but if you don't mind, i'll be keeping my tin hat handy just in case.

 

[growing_older]

I am starting to wonder if all the talk, press, media, scary stories about the coming depression will in fact make the current economic downturn mush greater and risk becoming a depression (no comment about "great" or not). There have been some layoffs in my field and more are expected. Most people I talk to are saying they would drastically cut back spending if they were unemployed and they anticipate a long job search. In fact many are already cutting back spending in advance of any layoff - so their spending is dropping to near lowest level - even if they are not involved in layoffs. Economic activity will certainly drop as employment drops, but the excessive anticipation of hard times seems to be inducing people who are still employed to drop their level of economic activity as well. Will this compounding effect make it worse?

 

[lazygood4nothinbum]

better to not discuss the situation? which came first, the crash or the media coverage of it?

 

[tightasadrum]

Just curious. What was the national debt in the 1930's? What was it as a percent of GDP? How much do we owe China anyway? And the money we spend on foreign oil is also a concern to me as is the total and persistent imbalance of trade.

I saw one financial talking head this week in the UK state that the US would definitely be bankrupt in the future. He just couldn't state when. Just TALK of this kind is worrisome.

 

[dex]

I think part of this talk about depression is due that people haven't been through general recession in a very long time - early 1980s.

It is like if you were never punched in the face - it really hurts the first time. The second and third aren't so bad because you know what to expect.

 

[d]

in the Employment Act of 1946 (originally called the Full Employment Act of 1946), congress in their infinite wisdom outlawed "depressions" ... so have no fear.