Is America in Another Great Depression?

So the economy is still anemic; the stock market is down, people are hurting, unemployment is high, housing still sucks, and people; economists and average folks; are more pessimistic than ever. Some have spoken about the dreaded "double dip;" as though the recession were some kind of an ice cream service (double dipped with rainbow sprinkles). Still this double dip recession ignores perhaps the even more frightening fact; a fact which will only be illumed with the wisdom of hindsight; the fact that we indeed could be at the precipice for a second Great Depression.

Whoa, Great Depression? No way! That was a long time ago; before the Internet! Before Starbucks! Before the interstate highway system! How could we, in 2010 have anything like the Great Depression? While history will decide what this period of time is called, the parallels between what would come to be known as the lead up to the Great Depression and our current situation should be duly noted.

Banks: The greatest cause of the Great Depression was the failure of banks. Investors in the 1920's all felt like less government regulation in the free markets is the best thing. They were probably right in theory; in practice though corruption ran rampant when left unchecked. From a very illuminating paper on the Great Depression at the University of Illinois (1): "Many banks were consequently forced into insolvency; by 1933, 11,000 of the United States' 25,000 banks had failed. The failure of so many banks, combined with a general and nationwide loss of confidence in the economy, led to much-reduced levels of spending and demand and hence of production, thus aggravating the downward spiral."

So where do we stand with failed banks at present? According to calculatorplus.com (2) "Since the start of the financial crisis in 2007, there have been 277 bank failures with assets totaling a staggering $627.5 billion, deposits totaling $441.1 billion, and at an estimated cost to the FDIC's Deposit Insurance Fund (DIF) of $71.4 billion." So while the numbers of banks isn't nearly as high as the number of banks in the actual Great Depression that probably has more to do with the fact that banks today are a lot more interconnected. During the Great Depression the reach of the banks was a lot smaller; thus their numbers were far greater than the number of failed banking institutions today.

Boom/Bust: During the Great Depression, there was a lot of hype, a lot of heresy, a lot of dangerous supposition, and a lot of speculation. People thought that the high flying good times of the 1920's would go on forever. "The US economy had experienced rapid economic growth and financial excess in the late 1920s, and initially the economic downturn was seen as simply part of the boom-bust-boom cycle. Unexpectedly, however, output continued to fall for three and a half years, by which time half of the population was in desperate circumstances. It also became clear that there had been serious over-production in agriculture, leading to falling prices and a rising debt among farmers." Lack of demand, too much supply , and inflated prices just leads to more supply and people tightening their belts that much more.

One need look no further in recent history than the dot com bubble of the 1990's to find similar pains. There was no foundation for this meteoric rise in stock prices. From theinvestorsjournal.com (3) "The fundamentals of the Dot-com bubble were horrible, most new public companies weren't profitable and some had no intention of ever making a profit. IPOs were going sky high while the business model itself showed no realistic way to turn a profit." If you have something which only has value on paper you're going to strain the system and drive down values to true levels when the sham is revealed.

Still, one need not even go that far back to draw parallels between the Great Depression and the excesses of today. Our ongoing housing bubble is really where comparisons are drawn into stark detail. The housing bubble, a bubble which many economists argue is still ongoing today, is this inflated and overleveraged housing market where people are using the momentum of the last 30 years to spur on inflated prices in homes. "For a hundred years, from 1896 to 1996, nationwide house prices just tracked the overall rate of inflation. This is a very long period in a very big market. If we see a trend like this persist for a hundred years it is reasonable to expect it to continue into the future, unless something big in the fundamentals changes. And, no one has produced any evidence that passes the laugh test that anything in the fundamentals of the housing market has changed." So even during the Great Depression, home prices remained largely tied to inflation; it's only in the last 15 years that home prices have taken off leaving many homebuyers so far underwater that any hopes of getting out is a sobering reality.

Government Intervention: During the Great Depression it is taught in schools (at least the public schools I went to) that FDR's New Deal was the spark that got the recovery from the Great Depression started. Actually that's not true. The New Deal, it's written, "...did not lead to rapid recovery. Income per capita was no higher in 1939 than in 1929, although the government's welfare and public works policies did benefit many of the most needy people. The big growth in the US economy was, in fact, due to rearmament." World War II was what got the United States out of the Great Depression.

As anyone who is paying attention is well aware; Barack Obama is trying to do a lot of things at once to stimulate the economy; none of which has worked very well to this point. His Obama-healthcare initiative is viewed by many as the wrong medicine for everyone; employed or not; his increased taxes is bad news for investors and small business; the President's other socialist tendencies have resulted in a strong backlash from the opposition; leading such aggressive voices as Sarah Palin, Glen Beck, and Rush Limbaugh to take him on in over-the-airwaves parlance. The Tea Party is a direct reaction to Obama's economic policies and this movement could experience big gains during the mid-term elections.

Or nothing could happen. People don't seem engaged or at all motivated to do much of anything. Some blame the electoral college (and the subsequent "red-state; blue-state" discussion) some people blame the fact that whether or not we get a Democrat or Republican in office, they are going to be beholden to so many special interests that they all just end up in a whitewash at the end of the day. Others just offer that the right candidate hasn't emerged yet; no one with the same gusto and zeal and courage in the face of striking adversity has come about yet. Some thought that this candidate was going to be Barack Obama but he's been the exact opposite of what he sold himself to the American people as. Maybe he will surprise us but he hasn't yet exhibited any of that "Yes, We Can" bravery in decision making; the Barack Obama policy looks like it's trying to be a newer version of the New Deal. But we already have the Hoover Dam. So that's not really going to work for us right now.

...Until Kim Jong Il or some other whacko does something actionable; then all bets are off.

Sources:
(1) http://www.english.illinois.edu/maps/depression/about.htm
(2) http://www.calculatorplus.com/savings/advice_failed_banks.html
(3) http://www.theinvestorsjournal.com/lessons-from-the-dot-com-bubble/