In order to justify the stressfulness of the stress tests, folks keep repeating the line that the estimated losses would be worse than the Great Depression. That’s somehow supposed to be reassuring, and it appeals to the (entirely psychological) idea that however bad things get, the Depression is surely the low mark.
But this is purely false comfort. The massive loan losses we’re seeing are simply the result of an economic downturn — it’s the result of an economic downturn coming on the heels of a period of horrible lending profligacy. Subprime, alt-A, no-doc, cov-lite, HELOC… all kinds of garbage was lent out.
And besides, the crisis is fundamentally different than the Great Depression — Back then, the banks were fairly sound, and truly suffered a crisis of confidence. Now we have FDIC guarantees, guaranteed overnight lending and other measures to stave off the crisis of confidence, but gloss over the crisis of bank losses.
So, sorry, this particular Great Depression comparison doesn’t do much for us.
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