Monday, October 20, 2008

Top 10 Reasons Why This is not the 1930s

  1. Productivity is high today, and was low prior to the 1930s bank panics
  2. Nonfinancial corporations are very profitable this year, and were not prior to the 1930s bank panics
  3. GDP had grown at least through 2008 Q2. Friedman and Schwartz (p. 306) explain how the economy had already declined very significantly by October 1930: "Even if the contraction had come to an end in late 1930 or early 1931 ... it would have been ranked as one of the more severe contractions on record."
  4. The Midwest grew corn very high this year, and was a dust bowl in the 1930s.
  5. Bank deposits increased during this year's financial panic, they fell during the 1930s (Friedman and Schwartz, Chart 27).
  6. Today's banks suffer from a crisis of solvency; 1930s banks suffered from depositor-runs (see Anna Schwartz).
  7. Today's failed banks are gobbled up by large investors from around the world. In the 1930s, many of them just failed.
  8. Today bank lending rates are falling; in the 1930s they were not.
  9. Today we have inflation (so far); in the 1930s there was deflation (both before and after the bank panics).
  10. Today JP Morgan Chase is buying competitors; in the 1930s JP Morgan was buying competitors (OK, I admit that this hasn't changed!)

Please let me know if you see any further similarities or differences.


jdh said...

How about the most important reason:

1. In the 1930s, the US was on the gold standard, which limited the monetary policy of the Fed; today, we are not on the gold standards and the Fed has the power to inject liquidity in the system.

BloggerNate said...

very true about the gold standard, we have nothing to back up worthless paper even though that does stop countries from accepting it... i think the scariest thing though is that we are going further and further into debt, which is being financed by the Chinese. The Chinese need to float our currency, for now but one day they well come knocking for what is owed and we will either have to scramble to borrow for it or stand there like that Monopoly card with the guy with empty pockets. OPEC also sees what is happening and calls an emergency meeting to cut production so we will have to pay more for oil while they buy up American companies. I'm not going to go as far as to say that we are doomed, because everyone thought that during the depression but it definetly will get worse before it gets better. We are headed for scary times....

rmmonihan said...

Safety nets today are very different than they were in the 1930's. The collapse of both savings banks AND the stock market led to a massive sale on Wall Street in order to generate cash which literally evaporated.
Given the safety nets in place today with deposit insurance, unemployment insurance, and various other public assistance, the probability of overwhelming panic selling without a followup bull market is unlikely.

Debt is an issue, certainly THE issue leading to clogged lines of lending. But the Chinese as a threat is laughable. Should they choose to call the debt, they recognize the damage to their economy would be far greater than any invoked upon ours. Remember, Europe was a massive debt-riven region post WWII, and is in remarkably good shape today (relatively speaking, of course). Debt can be bad, but isn't always.

Personal debt is my personal worry. While I have none, is it any surprise we as a nation face a lending crisis when the average household is faced with three times as much debt relative to income? This can be burned down quickly, however, and does not represent a long term drag on resources.

Finally, the ability to reflate the currency if deflation sets in was not considered a viable option in 1930.

Andrew Abraham said...

Interesting points....We have been discussing this intensly on ..some of the issues we have discussed is the continued downward spiral in house prices.. ( seems nothing has been done to abate this) as well as the banks still are not lending..there is a tremendous liquidity squeeze well as just the level of consumer confidence...

Let us know where we are wrong... I would greatly appreciate you expressing your ideas on members can learn from you...thanks