The Great Depression: The sequel

Is it coming to a soup kitchen near you? Here's how we'll know if the current recession is turning into something much worse.

By Andrew Leonard
Published April 2, 2008 3:13PM (UTC)
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A record number of Americans receiving food stamps. Gas prices at an all-time high, and staples such as milk, eggs and bread costing a prettier penny every week. The average number of Americans filing for unemployment benefits reached its highest level in two years last week, while just this week, construction spending fell for the fifth straight month and manufacturing activity shrank to its lowest level in five years. Real estate values are even plummeting in the Hamptons, and hedge funds started off 2008 with their worst quarter ever.

Most economists are no longer debating whether there will be a recession in 2008. Now, they're arguing over when the recession started -- was it last November, or December? -- and how bad it's likely to get. While they bicker, however, a far more terrifying economic specter from the distant past has sent a chill through the infosphere.

"We have not seen a nationwide decline in housing like this since the Great Depression," said the CEO of Wells Fargo late last year. "It is now clear that the U.S. and global financial markets are experiencing their worst financial crisis since the Great Depression," wrote economist Nouriel Roubini last week.

The Great Depression?

For the majority of Americans alive today, the Great Depression has an almost mythic luster. We may not remember it -- if you were 18 during the crash of 1929, you're 97 now -- but we cannot escape its foundational legacy. At the very least, we know that back then was when times were really bad, because that's the standard by which historians, economists and journalists always measure every other potentially bad time. Conservative and liberal economists are still arguing over what caused it and whether Franklin Roosevelt's New Deal fixed the mess or prolonged the pain, but there's no arguing with the historical record: The Great Depression happened, scarring the lives of millions of Americans and fundamentally changing the course of politics in the United States.

So when you hear the phrase "since the Great Depression," you know it's time to tighten your belt, and maybe put off splurging on that next vacation. But what about taking it to the next level? What is required to move past "since" and smack into the much scarier "as bad as" category? As in -- the current economic crisis is as bad as the Great Depression. Or, bluntly put, how will we know when and if our current recession has morphed into a full-fledged depression?

Let's concede right off that the question is still speculative. The U.S. economy is not even technically in recession yet, either by the standard definition of two consecutive quarters of negative GDP growth, or as "officially" declared by the National Bureau of Economic Research. If we define a "depression" as a decline in GDP of 10 percent, then the U.S. is nowhere close.

In 1933, 24 percent of the workforce was unemployed. In February 2008, according to the Bureau of Labor Statistics, the U.S. unemployment rate was 4.8 percent (though there are reasons to believe that number significantly underestimates the true picture). Between 1929 and 1933, U.S. GDP growth declined by around 30 percent, the stock market lost almost 90 percent of its value, and a whopping 40 percent of the nation's banks failed. In the fourth quarter of 2007, GDP growth registered an 0.6 gain. While stocks are down over the last year and a half, there's still no consensus about whether we're living through a "correction" or a full-scale bear market. And even though scores of mortgage lenders have declared bankruptcy in the last year, both the real banking system and the so-called shadow banking system of generally unregulated investment banks and hedge funds are still afloat, thanks in large part to Federal Reserve chairman Ben Bernanke's dogged determination to ensure that if economic disaster does strike, it won't be because the Fed failed to pump enough liquidity into the system (an error that conservative economists are convinced helped cause the first Great Depression).

So we're not there yet. And maybe we'll never get there. Who knows -- maybe those economic stimulus checks due to arrive in another month or so will sufficiently juice the economy so that the great housing bust and credit crunch of 2007-08 suddenly fade away like a bad dream.

But we could get there. In fact, it would be all too easy. All we have to do is ignore what the markets and other economic indicators are telling us right now and continue down the disastrous path we've been merrily skipping along for the last 25 or so years. Want to see "The Great Depression: The Sequel"? Here's a handy three-step do-it-yourself action plan.

1. Continue to ignore growing income inequality and govern the United States for the benefit of the rich at the expense of the many.
2. Continue to whittle away at the safety nets that exist to cushion Americans from economic ill winds.
3. Continue to weaken government oversight of Wall Street.

Or, in other words, combine Treasury Secretary Hank Paulson's toothless regulatory "overhaul" (which, absurdly, would actually result in less government oversight of the financial markets than currently exists), with Sen. John McCain's pledge to continue the economic policies of George W. Bush (read his lips: make the tax cuts permanent). Presto: A severe recession gets the opportunity it has long been waiting for and heads south for parts unknown for almost a century.

The first frightening aspect of how the global economy is currently structured that should be made clear is the extraordinarily fragility of the edifice of modern capitalism. "Systemic risk" is a phrase we've heard frequently from bankers and regulators and economists in recent months -- almost to the point of not stopping to think about what it means. The possibility of "systemic risk" is the possibility that markets and the banking system could collapse, that the amazing disintegration of a company like Enron or Bear Stearns could be duplicated on a systemwide scale. The speed with which Bernanke and Paulson rallied the troops to force Bear Stearns to sell itself to JP Morgan provided ample proof of how scared they were that the bankruptcy of just one investment bank could set off a chain of falling dominoes that would take down scores of other major financial institutions, and result in a market sell-off rivaled by only, you guessed it, the crash of 1929. This is no left-wing Marxist fantasy. Ben Bernanke made his academic bones studying the Great Depression. He has taken every possible opportunity to backstop the banking system and markets, with rate cuts, easy access to credit, and billions of dollars in liquidity in exchange for dubious collateral, precisely because he knows exactly how close to the brink we are. If we don't fall over the edge, kudos to him, but let's not try to pretend that the cliff was never there.

Now, once you've digested just how slender are the threads upon which modern financial markets hang, here are some more numbers to chomp on: Last October, citing Internal Revenue Service data, the Wall Street Journal reported that the top 1 percent of Americans earned 21.2 percent of all income in 2005. That's the highest measure of income inequality since, you guessed it, before the Great Depression. The numbers may be off that peak for 2008, given the carnage on Wall Street, and all those investment bankers trying to sell their weekend homes in the Hamptons into a sagging real estate market. But not by much.

However you slice it, it's an appalling statistic. It may not carry the same visceral visual punch as a Hooverville, but it sends the same message: The richest Americans are gobbling up the lion's share of the fruits of economic growth, while for everyone else, wages barely keep up with inflation, good jobs become increasingly scarce, and making ends meet gets tougher and tougher.

Right-wing economists tell us that allowing the rich to grab such a huge percentage of national wealth rewards the most "productive" sector of society and encourages them to create even more wealth, which eventually trickles down to all Americans. So who cares if the income inequality chasm has widened to historically unprecedented heights? Poor Americans now are rich compared with poor Americans in the 1920s. They've got their fancy TVs and access to an extraordinary array of cheaper-than-cheap products at the nearest Wal-Mart. Are they starving? No, the big social problem is rampant obesity! So let the good times roll, and make those tax cuts permanent.

There are some holes in that logic. The average American family carries upward of $8,000 in credit card debt. The personal savings rate has never been lower. Healthcare costs are inconceivable for anyone who doesn't have insurance. And right now, home prices, which represent the largest chunk of net worth for most Americans, are dropping at a rate of 10 percent a year.

Never mind how these statistics make a mockery of the thesis that encouraging the top 1 percent of Americans to gorge themselves on 20 percent of the pie breeds prosperity for all. The truly discouraging aspect to all this is that if the current economic woes deepen into a severe recession, or if a systemic shock seriously rattles financial markets, Americans are less equipped to weather the storm than they have been since, well, the Great Depression.

That last point to underline is that the hands-off-Wall Street, deregulatory impulses unleashed by Ronald Reagan and expanded by all his White House successors have directly contributed to the precarious state of today's average American. The housing crisis offers a terrific example. Yes, speculation by housing flippers played a role in fueling the boom, and so did fraud on the part of both lenders and borrowers. But Wall Street's hunger for high-yielding complex financial instruments, that alphabet soup of CDOs and CMOs and countless other inscrutable derivatives, created the fundamental incentive that encouraged lenders to provide credit without restraint. The voracious demand for the junk encouraged the creation of more junk. And nobody asked any tough questions, all the way down the line. Worst of all, the hedge funds and investment banks that bought and sold these derivatives did not operate under the same levels of government scrutiny that traditional banks must face. Quite the opposite -- the more complicated the financial innovation, the less likely it was to fall under any government oversight. And that was no accident -- that was done on purpose. During both the Bill Clinton and the George W. Bush administrations, Wall Street got exactly what it asked for -- a light hand on the reins, but with the tacit assurance that if the shit really hit the fan, the government would bail it out, because, of course, the awful consequences of systemic collapse would be too devastating to risk.

We are not totally bereft. As Slate's Daniel Gross cogently explained last week, the institutions created during the Great Depression, despite persistent Republican efforts to dismantle them, still provide a sturdy bulwark protecting Americans from abject, 1930s-style levels of misery and poverty. But those relics of the "nanny state" are under constant attack by starve-the-beast radicals whose explicit goal is to roll back the New Deal. And now we have Hank Paulson telling us that a new regulatory system needs to be even less onerous for Wall Street's innovators to bear, while John McCain lectures Americans on how Wall Street deserves a bailout if financial meltdown looms, but individual Americans who screwed up deserve to stew in a soup of their own irresponsibility.

We shouldn't have to require a depression, or even a severe recession, to send the discredited approach embraced by the current administration and the Republican aspirant to the throne into the dustbin of history where it belongs, there to malinger until today's 18-year-olds celebrate their own 97th birthdays. The events of the past few months should be lesson enough. But we'll have to wait until November to see just how many Americans are paying attention.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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