MY EYES were glued on Suze Orman, well-known personal finance expert and author, as she affirmed to Larry King yesterday on Larry King Live on CNN that the current crisis is comparable to the Great Depression. See the rush transcript here .
Because of the US subprime crisis, the US big banks are falling, and so does everything else—stocks, yields, even the super insurer AIG, so it does seem like the sky is falling worldwide. After Bear Stearns, Lehman Brothers, and Merrill Lynch, two other banks—Morgan Stanley and Washington Mutual–are up for grabs. Just a few hours ago, news came in that central banks in other countries are pumping cash into their economies to help stabilize markets.
So, is this really the Great Depression 2.0?
The Great Depression happened in 1929 when the US stock market crashed on October 29, which has since been referred to as Black Tuesday. Crop prices fell, trade declined, businesses closed, incomes diminished, jobs became scarce, and in Gone With the Wind, Scarlett O’Hara had no choice but to face poverty. It was a devastating event for people who just experienced prosperity in the roaring ‘20s. It spread from the US to other countries and lasted into the late ‘30s when World War II began.
Historians say the great imbalance of wealth and stock market speculation caused that 1929 Great Depression. The rich became so rich, while the rest of America discovered credit, and soon consumers had so much debt they couldn’t buy every new thing coming out of assembly lines. Farmers also encountered an over-supply situation in the international market, so prices fell. Then it snowballed from there.
But thanks to government reforms and assistance, the US and other countries got back on their feet. Economic slowdowns happen, but they don’t last forever.
Since then, financial reforms and restrictions have been put in place, so we stand a greater chance of bouncing back faster from economic setbacks. As the Bangko Sentral ng Pilipinas says, RP banks are safe.
A New York economist shares the same view. Mark Getler, an economist from New York University, was quoted by Wall Street Journal saying: “This has been the worst financial crisis since the Great Depression. There is no question about it. But at the same time we have the policy mechanisms in place fighting it, which is something we didn’t have during the Great Depression.”
So business goes on. Back to work, guys.
September 22nd, 2008 at 4:57 pm
To Bruce in Iloilo, thanks for taking time out to post here.
I didn’t say that the Great Depression was caused by the US stock market crash, but that it happened at that time.
As to the causes of the Great Depression, there are many theories posed by experts, and your points are also valid. The Internet yielded a lot of information about the Great Depression, and one of the sites I looked at for reference in writing the article is MSN Encarta (http://encarta.msn.com/encyclopedia_761584403/Great_Depression_in_the_United_States.html), among others.
As to the farm prices, I did say in the 5th paragraph that farmers’ prices fell as a result of an oversupply situation in the international market. Since this paragraph was about the causes of the Great Depression, it follows that the situation about the farm prices happened before that event.
Thanks again, Bruce, for your insights. Such comments keep us on our toes.
September 22nd, 2008 at 4:22 pm
the rich are getting richer and the poor getting poorer. so, what happens to the middle class, they are becoming less and less. some of them become rich, while some of them becomes poor.
this maybe only the tip of the iceberg, i think there’s more to come by next year with their economy.
The thing by the coming years, there will be millions of retirees under their sleeves, those age 65 and above, that the US govt will need to fund. So, where will they get the money to fund those retirees??? that will push them again into a downturn. just like what france, germany and greece is experiencing right now. Too many old people from their country, but too few a population of younger generations. So, younger generations cannot sustain from their taxes the pensions of the older ones.
Furthermore, this is the result of their population control that began in the 80-s,that creates an imbalance in their economy to which they are feeling right now.
September 21st, 2008 at 11:01 am
One example of the incorrect history is the discussion of farm prices. The Dust Bowl and the farm depression started several years BEFORE the 1929 Crash. During World War I and in the years immediately after, farmers did very well; there was little competition from Europe. As European farmers came back on line and the demand that peaked during the war declined, farm prices and farmers took a hit. At about the same time, a Dust Bowl occurred and farms literally blew away.
Another point: disparities in wealth do not cause economic downturns. There is no evidence that having very rich people or a great disparity in wealth between rich and poor cause economic chaos. Such may cause other problems, but not economic downturns.
September 21st, 2008 at 10:55 am
Sorry but your history is weak. The 1929 Stock Market Crash did NOT *cause* the Great Depression though it does mark its beginning and the panic that it represents is one of the causes.
The basic cause was a lack of money flow. When the post-war, 1920s, automobile-inspired bubble burst, people took their money and stuck it under the mattress. The Federal Reserve *raised* interest rates, further restricting money. The US government *raised* taxes. And governments around the world *increased* tariffs, for instance the Smoot-Hailey Tariff in the US.
This had the effect of breaking up the free flow of capital, indeed free markets itself, leading to a great contraction in the economy. In fact, many argue that FDR’s New Deal worsened the Great Depression but over-controlling the economy and therefore discouraging people from investing in new businesses and thereby grow the economy.
September 20th, 2008 at 7:57 am
Awesome! post Danny. Great question..where do you park the mula now?..Hmm..I’m in alternative energy and distribution systems and food. The world is in a paradigm shift..US will be dislodged as Intl. community will divest out of US treasuries..and dump a lot into infrastructure/nation building stuff…just my humble opinion.
Zeitgesit: Who’s next? CDS will blow-up, next wave of Option ARMs will hit soon, Foreclosure will rise..banks will back under pressure..US can no longer increase debt (we’re at 9 Trillion now and potentially just added another 1 Trillion in a span of a couple months)..this credit/debt cancer has metastasized…these capital infussions are just delaying the inevitable. But it will not be contained in US..the old adage..when America sneezes everyone else catches a cold…is still somewhat true..decoupling my posterior!!..so as for you folks back in Pinas…pray!