If there’s one thing that almost all economists agree on (even Nouriel Roubini), it’s that we won’t have another Great Depression. Why not? Because in 1929, we were a primitive cave people, who knew next to nothing about economics. Now, we’re experts, and there’s no way we’d ever behave so stupidly again.
Given a century in which, despite our increasing sophistication, booms and busts have followed each other like nights after days, it might be time to revisit the happy idea that we now know enough to control economic cycles. But we’ll leave that one for another day.
For now, let us at least remember that, in the summer of 1930, a year after the Great Bull Market of the 1920s came to an end, we didn’t think we were headed into a Great Depression, either.
LIKE most economists, those at the International Monetary Fund are lowering their growth forecasts. The financial turmoil gripping Wall Street will probably spill over onto every other street in America. Most likely, current job losses are only the tip of an ugly iceberg.
But when Olivier Blanchard, the I.M.F.’s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was “nearly nil.” He added, “We’ve learned a few things in 80 years.”
Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?
The Depression began, to a large extent, as a garden-variety downturn. The 1920s were a boom decade, and as it came to a close the Federal Reserve tried to rein in what might have been called the irrational exuberance of the era.
In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive sectors like construction slowed.
But things took a bad turn after the crash of October 1929. Lower stock prices made households poorer and discouraged consumer spending, which then made up three-quarters of the economy. (Today it’s about two-thirds.)
Actually, it’s more than that–or it was, before the recent collapse. At the peak, consumer spending got up over 70%–very close to the 1929 level.
Greg goes on to note the bank failures of the early 1930s, and the apparently boneheaded moves the government made to get the economy back on the right track again. He observes that bank failures cost depositors and shareholders the equivalent of $340 billion in losses. That sounds like a huge number, but when you add up Bear Stearns, Lehman, AIG, Fannie, Freddie, and the hundreds of billions in market value that have been lopped off of every other financial institution, we’ve probably already blown past that (the losses to depositors, thankfully, are likely far less).
The big mistake in the 1930s, most historians concur, is that the government tightened the money supply. Ben Bernanke is one of those historians, and he’s now printing as much money as he can.
We certainly hope this works. For now, however, we just can’t take much solace in the consensus that we know better now, that it’s different this time.