Today is Worse than the Great Depression

The current scenario is becoming one that would have been unimaginable to many even as recently as October. In so many ways, it is much worse than the Great Depression.

We've all heard the stories about the Great Depression and we've all been told that we've learned our lessons. We know that the apparatus and regulations were in place to make sure that nothing like this could ever happen again.  Well, it is happening again and it is just as serious. In fact it is more so.

The Great Depression was marked by several realities - one was borrowing to buy equities (a stock market crash) and a loss of confidence in the banks.

We arguably haven't had the same time of borrowing to buy equities by retail investors that we had in 1929, but we have had borrowing for everything else - including homes - often multiple borrowings on multiple homes, commercial real estate, aircraft, etc. Lending to consumers and businesses became a sport for financial institutions which would package this lendings, divide them into tranches, get a rubber-stamped credit rating and then sell them off throughout the system leaving vulnerable purchasers unaware of what they were buying.  The fiction behind all of this lending was that asset prices would always continue to go up and when that fiction failed, holders of this paper wanted to sell.  With nobody wanting to buy, the banks that bought and sold these packages proved illiquid.  While the FDIC and SIPC provide deposit protection to prevent a run on the banks, the reality is that these institutions are sitting on pools of assets (paper or lendings) for which there is no marketplace and unlikely to be any marketplace and their core businesses of providing too much leverage have failed.  If these institutions are ever profitable, it won't be for a long time.

TARP was designed to remove these bottlenecked lendings from the system, but the money ultimately went into the banks directly, and when the bottleneck was removed and the banks didn't start lending, we entered the current phase which is where the entire economy now needs to deleverage dramatically and quickly.  The results of the current crisis can be very damaging - as leverage is removed, economic activity declines.  Equity values fall dramatically not because they were overvalued 18 months ago, but because the fall in leverage and in economic activity causes companies to earn less.

Then, we compound all of this with the fact that it is a global crisis and emerging markets have proven themselves to be overlevered to commodity prices which have crashed, a government that is overleveraging itself to the hilt, and the complete and utter failure of the US's industrial economy due to its reliance on the auto industry. 

We have a crisis of epic purportions to which the Great Depression is no match.  We need to brace ourselves for a very, very difficult decade ahead.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • Art

    February 22, 2009

    This is of course ridiculous. The comparison is invalid. During the Great Depression US GDP fell by over 25% and unemployment was over 25%. Today, we are talking about declines of 1-3% and unemployment at 10%. No comparison.

    The better parallel is Japan in the 1990s. Same thing happened there and they suffered a decade of recession and subpar economic growth. That seems reasonable for the US.

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