The Great Depression Again?

Lately, some compare our current recession to the Great Depression. Ben Bernanke, the Federal Reserve Chairman, and a student of the Great Depression, addressed this at the Austin Chamber of Commerce. He said there was no comparison between our economy and The Great Depression - where unemployment peaked at 25%, the GDP lost about one-third, about 50% of homes foreclosed, around 1 out of 3 banks failed, and the stock market lost about 90% of its value. In contrast current unemployment is at 7.2%, the GDP lost 0.5% in the 3rd Quarter, the stock market has lost about 40% of its value, and the foreclosure rate is around 1 percent. Even if unemployment becomes worse in the coming months, and GDP loss grows, it is unlikely we will reach Great Depression levels.

Others say it is the worst recession since The Great Depression. However, since the Great Depression, we have had 11 recessions according to the National Bureau of Economic Research (NBER). The worst unemployment during those recessions was a peak of 10.8% during the 1981-82 Recession. The worst quarter GDP loss was a 10.8% loss during the 1957-58 Recession. At the current moment, we are still over 3% away from the peak worst unemployment, and 10.3 % away from the worst GDP quarter loss. (See update.)

Yet others say our recession could become the worst one since the Great Depression. We don't know that yet, and it is speculation at this point to so predict. Those who do so mostly want to justify an extremely large government spending program to address the situation they claim. This doesn't mean we are not facing a serious situation, but overexageration of how bad it is does not help, and can make the situation worse as consumers hold back on spending and investors hold back on investing.

What is true is that we are in the worst financial crises since the Great Depression. We are still in the midst of a collapse of housing bubble, which has far reaching effects in our financial institutions, resulting in their collapse. In the Great Depression, the relatively new Federal Reserve failed to take action to save collapse of major financial institutions, which led to a run on many banks. The resulting decrease in the money supply helped to turn an initial recession into a great depression.

This time, both the Fed and the Treasury, with the help of TARP, have flooded financial institutions with money to keep them solvent and liquid. This should keep the recession from turning into a depression as in 1930, though more has to be done, which is why the 2nd part of TARP was approved. However, the current recession is not yet the worst recession since the Great Depression. Saying it is so just to justify large government spending programs is not true, at least not yet. Basing a large government spending program on this basis is less than honest. Those doing so most likely favor large government spending programs anyway. The problem is the proposals so far will increase the deficit to about a staggering $2 trillion dollars for this fiscal year, making any past deficit look almost trivial in comparison.