It is interesting to see that almost everyone (media and politicians) is saying that this is not going to be like the great depression when actually there is an amazing amount of simmilarity between the current situation and the 1930's. Like in that era, there was a big increase in household and business leverage and great confidence that crissis could be averted by policy measures.
I think there is a possibility that things may have changed in an irreversible way in the last year and that they maybe quite different in the next 15 years to what they were in the previous 15. We now have a worldwide economic downturn with likely recessions in 2009 for US, EURO, Japan, China, basically everywhere, except perhaps australia and one or 2 other countries
Zooming back in history (using wiki's description of the great depression) : what is missing except Smoot-Hawley, protectionism and war ? Maybe that is for later.
http://en.wikipedia.org/wiki/Great_Depression
1. The Great Depression was a worldwide economic downturn
2. The Great Depression originated in the United States due to stock market revaluations from 1929
3. structural factors such as massive bank failures were significant
4. Massive increases in deficit spending, new banking regulation, and boosting farm prices did start turning the U.S. economy around, but it was a very slow and painful process. The U.S. had not returned to 1929's GNP for over a decade and still had an unemployment rate of about 15% in 1940 — down from 25% in 1933.
- Hoover launched a series of programs to increase farm prices, which failed, expanded federal spending in public works such as dams, and launched the Reconstruction Finance Corporation (RFC) which aided cities, banks and railroads, and continued as a major agency under the New Deal. To provide unemployment relief he set up the Emergency Relief Agency (ERA) that operated until 1935 as the Federal Emergency Relief Agency. Quarter by quarter the economy went downhill, as prices, profits and employment fell, leading to the political realignment in 1932 that brought to power the New Deal.
5. Australia's dependence on agricultural and industrial exports meant it was eventually one of the hardest-hit countries in the Western world. Falling export demand and commodity prices placed massive downward pressures on wages. Further, unemployment reached a record high of 29% with incidents of civil unrest becoming common.
4. Irving Fisher argued that the main factors leading to the Great Depression were overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles. He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:
Debt liquidation and distress selling
Contraction of the money supply as bank loans are paid off
A fall in the level of asset prices
A still greater fall in the net worths of business, precipitating bankruptcies
A fall in profits
A reduction in output, in trade and in employment.
Pessimism and loss of confidence
Hoarding of money
A fall in nominal interest rates and a rise in deflation adjusted interest rates
During the Crash of 1929 preceding the Great Depression, margin lending requirements were only 10%.
(*The equivalent now maybe what was considered "new" financial products, low doc, 90%+ and NINJA home loans)
In 1929-1935, when the market fell, the rate of loan defaults increased. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective . Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. In all, 9,000 banks failed during the 1930s. By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.
The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression.
Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.
(unfortunately definitions of unemployment have changed a great deal and are no longer comparable over multi-decade periods. It would be interesting to see what adjusted figures are for official unemployment today if it was 20% under the 1930's definition)
I think there is a possibility that things may have changed in an irreversible way in the last year and that they maybe quite different in the next 15 years to what they were in the previous 15. We now have a worldwide economic downturn with likely recessions in 2009 for US, EURO, Japan, China, basically everywhere, except perhaps australia and one or 2 other countries
Zooming back in history (using wiki's description of the great depression) : what is missing except Smoot-Hawley, protectionism and war ? Maybe that is for later.
http://en.wikipedia.org/wiki/Great_Depression
1. The Great Depression was a worldwide economic downturn
2. The Great Depression originated in the United States due to stock market revaluations from 1929
3. structural factors such as massive bank failures were significant
4. Massive increases in deficit spending, new banking regulation, and boosting farm prices did start turning the U.S. economy around, but it was a very slow and painful process. The U.S. had not returned to 1929's GNP for over a decade and still had an unemployment rate of about 15% in 1940 — down from 25% in 1933.
- Hoover launched a series of programs to increase farm prices, which failed, expanded federal spending in public works such as dams, and launched the Reconstruction Finance Corporation (RFC) which aided cities, banks and railroads, and continued as a major agency under the New Deal. To provide unemployment relief he set up the Emergency Relief Agency (ERA) that operated until 1935 as the Federal Emergency Relief Agency. Quarter by quarter the economy went downhill, as prices, profits and employment fell, leading to the political realignment in 1932 that brought to power the New Deal.
5. Australia's dependence on agricultural and industrial exports meant it was eventually one of the hardest-hit countries in the Western world. Falling export demand and commodity prices placed massive downward pressures on wages. Further, unemployment reached a record high of 29% with incidents of civil unrest becoming common.
4. Irving Fisher argued that the main factors leading to the Great Depression were overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles. He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:
Debt liquidation and distress selling
Contraction of the money supply as bank loans are paid off
A fall in the level of asset prices
A still greater fall in the net worths of business, precipitating bankruptcies
A fall in profits
A reduction in output, in trade and in employment.
Pessimism and loss of confidence
Hoarding of money
A fall in nominal interest rates and a rise in deflation adjusted interest rates
During the Crash of 1929 preceding the Great Depression, margin lending requirements were only 10%.
(*The equivalent now maybe what was considered "new" financial products, low doc, 90%+ and NINJA home loans)
In 1929-1935, when the market fell, the rate of loan defaults increased. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective . Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. In all, 9,000 banks failed during the 1930s. By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.
The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression.
Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.
(unfortunately definitions of unemployment have changed a great deal and are no longer comparable over multi-decade periods. It would be interesting to see what adjusted figures are for official unemployment today if it was 20% under the 1930's definition)
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That is a scary read!
