Great Depression? A Reality Check

October 1, 2008 by TFB

During the congressional testimonies for the bailout bill, we have the Treasury and Federal Reserve officials telling us of grave consequences if we don't do what they proposed. The Great Depression has been mentioned more than a few times. It reminds me of the talks about WMDs in Iraq. I don't pretend to be more knowledgeable than the gray hairs at the Treasury and the Fed. However I do have my own rudimentary sense of reality. I look around and I don't see any semblance of Great Depression or financial collapse.

On the Road. The roads are still crowded in the commute hours even though some people said they reduced driving at the margin. The commute train I take is more crowded than before. One way or the other, people are still going to work. The traffic was much lighter during the dot com bust. Right now it's not nearly as light as back then.

At the Office. All the projects my colleagues and I have been working on are still going ahead. Nothing I know has been canceled or put on hold. Nobody around me was laid off. Contractors, usually among the first to be let go whenever there is any downsizing, are still here. Again, during 2000-2002, I saw many co-workers laid off. The company I worked for wasn't even a dot com.

In the Stores. No massive price slashing or more store closing than usual. Prices are up, not down. There is still a waiting list for a Prius. I'm still not able to find a Wii at MSRP.

On the Stock Market. S&P 500 is off by about 25% from its all time high. A few companies went out of business or merged into other companies. The same happened during the last bear market. In 2000-2002, S&P 500 was off by about 45%. Remember Global Crossing and WorldCom? Even though WorldCom went out of business, its telephone network and its Internet backbone never stopped working. It's just under a different name, like WaMu is now JP Morgan Chase. There was never any talk about saving the country's telecom infrastructure by buying bad assets from the telecom companies or giving Microsoft a free loan because 90% of the world's computers run on Windows. Not that I recall anyway. People say the stock market is a leading economic indicator. The stock market is telling us it's nowhere close to the Great Depression.

I'm not alone. A recent Los Angeles Times/Bloomberg poll found that 50% of people said they felt less financially secure than they were six months ago. The other 50% said they felt as secure or more secure than they were six months ago. That doesn't sound like a looming Great Depression to me.

Don't let people scare you. After the dust settles, there will still be a financial industry in this country. According to Wikepeida, the dot com bubble crash wiped out $5 trillion in market value of technology companies from March 2000 to October 2002. Guess what, the country survived. People who lost their jobs eventually found jobs. IBM, Microsoft, and Cisco all had tough times during difficult years. Today they are still standing and making money. JDSU is often cited as a bubble burst badly. It's still around. We don't use Excite and AltaVista as much any more although both are still around. New companies also emerged, Google, Facebook, and Netflix being good examples.

We will have a few difficult years in some industries and a slow down in the economy in general. I can see that. That's business cycle. Great Depression? I don't believe it.

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Comments

8 Comments on Great Depression? A Reality Check

  1. Ted on October 1, 2008 | permalink
    2.  

    Well said.

  2. enonymous on October 1, 2008 | permalink
    3.  

    kudos to you
    i couldn't agree more

    sadly my rep voted for the bailout too, despite my emails that i sent

    my senators will vote for it tonight too

    and the new plan is even worse (except raising FDIC limits which make sense)

    oh well, it's government as usual, and very much business as usual too

  3. Debt Relief on October 1, 2008 | permalink
    4.  

    I think you are 100% right on on this. Thanks for taking the time to post

  4. john on October 2, 2008 | permalink
    5.  

    you are freaking me out. the evaporation of credit markets has not fully occured. should it do so, then you will see massive social change. you didn't read the link i posted about the asteroid coming toward earth. IT HAS NOT HIT YET. i cannot accept that a finance blog is not going to look at the root cause of concern WHEN THAT CONCERN IS FINANCE ITSELF. forget this i'm gone enjoy the yes men.

  5. TFB on October 2, 2008 | permalink
    6.  

    John – You are assuming the credit markets will evaporate. I don't make that assumption. The same for that asteroid coming discussion. I don't think it's a foregone conclusion that the asteroid is coming. You don't want to launch asteroid destruction missions at distant asteroids. The credit market will probably change from its current shape and form. But it hasn't been in its current shape and form forever. Our economy worked just fine before credit default swaps and collateralized debt obligations. As I mentioned in the other post, the FDIC process is working well. We know how to close down insolvent banks. We just have to use it more aggressively and more often. When the weak players are taken out of the market, we will have a healthy credit market again.

  6. john on October 2, 2008 | permalink
    7.  

    i'm assuming it's a real possibility and so are very smart people. i think it's deeply irresponsible to criticize the bailout based on a look around your neighborhood today. nobody is saying the calamity is here. everyone is saying if/when it arrives, it will be too late. this is the bizarre stuff that separates bloggers from news reporters. IT WILL SNOW? HERE? I WAS JUST OUTSIDE AND IT'S SUNNY!

    you bet credit would evolve. you'd go to the cash machine and it would be empty. so you'd hit up your neighbor for cash. hope that works out for ya.

    you had many great posts but really i can't sit and read this crap.

  7. erik on October 6, 2008 | permalink
    8.  

    The NY Times had an interesting article (click on my user name to read it) on how the basic mechanics of today's credit crisis is similar to what caused the Great Depression.

    The lesson from the article is the current "bailout" is needed to limit the downside risk of an economic disaster that could affect everyone, which unfortunately requires us to provide a crutch to some of the banks that caused the mess in the first place by taking on too much risk.

    I don't like the idea of taxpayers funding a "bailout" of Wall Street, but also recognize the need for the credit market to function properly for everyone's sake.

  8. TFB on October 6, 2008 | permalink
    9.  

    Erik – Thank you for pointing to the NY Times article. It said explicitly "Almost no economist thinks that even a terrible downturn would look like the Depression. … So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely." Therefore even though the mechanics are similar to what caused the Great Depression, they won't cause another Great Depression. That does not contradict with what I wrote in this post. I'm not advocating we do nothing. We need to take care of insolvent banks. FDIC has got that one down. No customers are hurt. Banks remain open after they fail — only the shareholders and sometimes the bond holders are wiped out. It's not a bailout when the shareholders are wiped out. But buying junk assets from banks is totally different.

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