Is It 1929 Again?

WP: Is It 1929 Again?
By Robert J. Samuelson
Monday, October 6, 2008; Page A15

Watching the slipping economy and Congress's epic debate over the unprecedented $700 billion financial bailout, it is impossible not to wonder whether this is 1929 all over again. Even sophisticated observers invoke the comparison. Martin Wolf, the chief economics commentator for the Financial Times, began a recent column: "It is just over three score years and ten since the Great Depression." What's frightening is not any one event but the prospect that things are slipping out of control. Panic -- political as well as economic -- is the enemy.

There are parallels between then and now, but there are also big differences. Now as then, Americans borrowed heavily before the crisis -- in the 1920s for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is a huge part of the economy (20 percent vs. 3 percent in 1929), and its spending -- for Social Security, defense, roads -- provides greater stabilization. Unlike then, government officials have moved quickly, if clumsily, to contain the crisis.

We need to remind ourselves that economic slumps -- though wrenching and disillusioning for millions -- rarely become national tragedies....

***

The Great Depression that followed the stock market's collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastation -- bankruptcies, foreclosures, bread lines -- lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?

Capitalism's inherent instabilities were blamed -- fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles. But the real culprit in causing the Depression's depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply....

What's occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It's said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already -- through various actions -- lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks' deposits....

The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501251.html?nav=most_emailed

we had factories and steel mills idled for lack of money, but physically able to gear up and start producing again.

Now we have moved all our factories and steel mills to China, Mexico, India, ...etc. We have nothing left to use for rebuilding, and no home-grown oil and gas to fuel that rebuilding. We are on the path to third-world status.

just sayin'

:evilfrown:

1) In 1929, the government was not heavily in debt as it is now.

2) In 1929, we still had a industrial economy that produced goods for domestic consumption and export, whereas now we produce very little (other than financial derivatives) and import more than we export.

3) in 1929, we supplied our own energy, but now we import a great deal of it.

The budget deficit, trade deficit, and dependency on foreign oil create impediments to an effective government response to this crisis, IMHO. Borrowing for the bailout will to a decline in the dollar, inflation, and an increase in unemployment. Doing nothing would most likely lead to higher interest rates, which would fuel inflation and unemployment. I don't think the federal government has many tools at its disposal, short of putting high taxes on the top 1% of the population to support massive infrastructure projects, and I doubt there is political will to do that.

the great drama of these recent weeks may prove blessedly misleading.

He seems to think you currently don't have "the mix of a weak economy and perverse government policies"! I'll bet the mix was immeasuraby more propitious then! But then, it is the Washington Post.

Although food production is much more efficient the world population has increased. And some food is being transformed into energy for transportation.