Today’s Economy & the Depression: Is it Panic Time?

October 31, 2008

Are we headed for another Great Depression?  It’s a question a lot of folks are asking these days.  Foreclosures are hitting record numbers, banks are failing, unemployment is on the rise, consumer spending is tanking, and the stock market is giving average Americans anxiety attacks.  It sounds frighteningly reminiscent of the Great Depression, but does it really compare? The Consumer Warning Network’s Angie Moreschi  takes a look at then and now.  Hear what some folks who lived through it have to say and the general consensus of economists today.

The Picture of Poverty

The images of the Great Depression are a frightening reminder of how the fortune of the roaring 20’s came crashing down.  Wandering homeless and unemployed…. soup kitchens… and breadlines for the starving. The fear today is with so much economic turmoil–  a volatile stock market, the disaster of the housing market, bank failures and consumer anxiety– could it happen again?

“I don’t think you can compare it,”  said Jan Newcomer, who lived through the Great Depression.  “I don’t think anyone realizes how dismal it was at that time… and desperate.  It was sad.”

83 year old Jan and 91 year old Ray Newcomer were kids during the Great Depression.  They remember vividly how different it was from today.

Mr. Newcomer says he had no toys, one pair of shoes and probably two shirts that his mother made for him. “Couldn’t buy anything, ‘cause no one had money,” he says.  “You didn’t think about money.  I went all through school.  I don’t think I had a nickel.  I know I didn’t ‘cause I don’t know where I’d get a nickel.”

Mrs. Newcomer says the 1929 stock market crash had a much more dire impact than the recent 777 point drop of the Dow Jones Industrial Average.  “It was frightening, because back then, I do remember people talking about the men jumping out the windows, because they had lost everything.  It was really, really bad.”

She says the magnitude was greater then, because it seemed everyone was poor. “My father used to talk to the hobos on the back stairs, and he’d say ‘That man was a doctor.’  I mean they were professionals who had no jobs.  I mean people didn’t have jobs.”

Unemployment Numbers

It’s estimated unemployment during the Great Depression reached 25-percent.  Today, it’s just over six-percent and expected to get worse, but most economists say it will go nowhere close to Great Depression levels.

“Certainly, we have some of the same downward trends that we had during the Great Depression, but the differences, I think, are much starker than the similarities,” said University of Tampa Economics Professor Dr. John Stinespring.

The Great Depression lasted a full decade– from 1929 to 1939.  Dr. Stinespring says the reason it was so long had to do with how the government responded to the crisis, from raising interest rates and taxes to decreasing the money supply.

“These policies by the federal government and the monetary authority, the Federal Reserve Bank, perpetuated, by almost every economists standards, what would have been a bad recession and made it a depression.  So let us hope that we’ve learned from history,” he says.

It seems we have. The $700 billion dollar bail-out approved by Congress is one, colossal effort to try and stimulate the economy.  “Treasury Secretary Paulson used the term bazooka.  He said the federal government doesn’t just have a gun to handle this problem to kill it in its tracks.  It has brought out the bazooka and is firing away,” Dr. Stinespring said.

Bank Failures

Another major difference between the Great Depression and today has to do with banks.  Today, even though we’re seeing a handful of major banks, like Wachovia, go under, it’s nowhere near the massive failures we saw in the 1930’s when literally 1000’s of banks went out of business for good.

Dr. Stinespring says the response today has actually been quite impressive. “The FDIC has been able to take troubled banks and immediately find buyers for them.”  He says that has prevented the mass panic that led to a run on the banks in the 1930’s.

“We don’t hear about Wachovia or Merrill Lynch as a major disaster, because they have been purchased by  Wells Fargo and Bank of America.  So banks have been able to step in and assume the deposits and assume the assets and liabilities.”

A Look at the Numbers

Essentially, while our economy has been pushed to the edge of a cliff today, the economy of the 1930s tumbled off:

  • Stocks hit the bottom in 1932 – down 80 percent from the 1929 peak. Today’s stock market has fallen about a third during the last year.
  • Unemployment reached 24.9 percent in 1933 with millions of people losing their jobs. Today’s unemployment rate is about 6.1 percent.
  • 40 percent of all banks – about 10,000 had failed by 1932. Today, 19 banks have failed.
  • A recession began two months before the 1929 stock market crash, during that two-month period production declined at an annual rate of 20 percent, wholesale prices fell 7.5 percent and personal income fell by 5 percent. In September 2008, production fell 11 percent; Wholesale prices fell 0.4 percent ; and, personal income increased by 0.5 percent in August 2008
  • The nation’s economic output, commonly called Gross National Product, dropped by 31 percent during the Great Depression. In the third quarter of 2008, America’s economic output decreased by .03 percent.

The Future

So, is it possible that we’re just in the early stages of a Great Depression and those darkest of days may still be ahead?  Dr. Stinespring says there was a feeling early in the 1930’s that the economy had seen problems before and would get back on course.

“There was a mini depression in 1921, and the country bounced back,” he says.  But Dr. Stinespring doesn’t think we’re being foolishly optimistic now, because he blames much of the Great Depression on how the government handled the crisis.

“We would need policy screw ups like the ones we saw during the Great Depression.  We’d have to make a lot of the same mistakes we made before and that seems unlikely.  That seems very, very unlikely,” he says.

Turning it Around

It took World War II to finally turn around the extreme poverty and despair of the Great Depression.  Mrs. Newcomer remembers it well.  “As soon as the war started, WWII, everyone had jobs. The fellows all left and went to the war, and the women all worked.”

Mr. Newcomer fought in Patton’s army, and Mrs. Newcomer worked for the government.   “We had pretty good jobs.  Government pay. Then I really went shopping,” Mrs. Newcomer said with a big smile and laugh.

Mr. Newcomer says it may feel worse for some today, because people have so much.  “People have too much.  When you don’t have anything to start with, the Depression didn’t make any difference,” he says.

The Newcomers now live a comfortable life in Tampa, Florida.  They’re not too worried about a crisis worse than the Great Depression.  Even if they have to cut back a little, they say it simply can’t compare.

Mr. Newcomer offers one piece of advice to folks on how to survive the economic turmoil today–“keep life simple.”