Posted by
Josh Todd on Thursday, March 05, 2009 9:37:54 PM
Many commentators have made comparisons between the Great Depression and our current predicament. Certainly there may be similarities—unemployment here in Dayton is approaching 13%, which is roughly the Great Depression low—but we are not quite there.
Still, I, myself, have studied the period between the mid-1920s and the early 1940s—the period that preceded the depression and the end—and there are some similarities and lessons we can draw. Likewise, the Great Depression can also be instructive as we endure our current recession.
Much like 1929, the year 2008 was one due for a slide in the business cycle. A recession hit the US economy in 1921, and 1929 was that magical seven-to-eight years later. Likewise, 2001 saw recession, only to be followed by the 2008-2009 slump. And anyone who knows business cycles knows that there are natural ups and downs (expansion, peak, contraction, trough, expansion, etc.).
Where 1929 and 2008 are alike is in the area of government policy. Not that the policies were the same, but government action worsened and prolonged two natural economic downturns. In both cases there are—and this is simplification of course, but necessary here—what I call Twin Bogeymen.
President Herbert Hoover signed into law two harmful laws (our first bogeyman): the Smooth-Hawley Tariff and the Revenue Act. The latter caused an international trade war that deprived American industry of export markets; the former squeezed the cash flow of Americans at a time when they needed cash. At the same time, the Federal Reserve engaged in monetary tightening, causing deflation. Mainly the tariff and deflation made the recession a depression.
Currently we can draw our situation to Twin Bogeymen that did not occur in the early days of our recession. Instead, these two policies were implemented well before 2008, but their devastating effects are still as crucial.
Bogeyman #1 was, again, the Fed. When the economy was strong in the late 1990s, the Fed tightened too quickly, squeezing potential homebuyers out of the market. After 9/11, the Fed loosened too much, which drew not only the homebuyers squeezed out in 1998-1999 but other buyers (greater credit risks) who had no business being in the market. This, in turn, caused a spike in demand, which led to greatly increased new home construction. Eventually, demand declined and a massive supply of houses caused values to drop.
Bogeyman #2 is the Community Reinvestment Act and the teeth it was given in the 1990s. This, too, drew high credit risks into the housing market. Combined with the low interest rates in 2001-2003, these buyers became an unusually large part of the housing market. As values dropped, homeowners with adjustable rate mortgages were unable to refinance as planned, resulting in (along with home “flippers” who began walking away from loans) a slew of foreclosures. Lenders were stricken and a financial crisis ensued.
Thus, we have our economic crisis, which has now bled into every part of the economy.
Though we do not yet have a depression, we may yet. The Twin Bogeymen of now definitely will prolong the current recession beyond its natural life. And much like 1933, 2009 may be witnessing policies that will only give the recession staying power, possibly leading to depression. But that’s a topic for another time.
Source(s): National Review magazine; “A History of the American People” by Paul Johnson, “A Patriots History of the United States” by Larry Schweikart and Michael Allen; “The Forgotten Man” by Amity Shlaes