New Economy: The Modern 1930’s

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Former Fed Chairman Alan Greenspan, one of the major architects of the current crisis finally “fessed up” the other day when he referred to the current crisis as the “most wrenching since the end of the Second World War.” But the end of the Second World War marked the start of the boom times in America (at least for those who lived to tell the tale) so he must really be referring to the crisis since the beginning of the Second World War, which would be the late 1930s. And this decade is basically where we are now.

The modern 1930s are the logical consequence of the “New Economy” of the past decade, just as the original was a logical consequence of the “Roaring Twenties.” In each case, technology and leverage combined to create a potent but ultimately poisonous brew of wildly inflated asset prices. In essence, greedy CEOs (and investment managers) said, “we brought you the new economy, please cash us out now.” And a gullible American public affirmed this by bidding up prices to insane levels, expecting to share, rather than subsidize, the wealth of the selling shareholders. First the tech companies, then the financial intermediaries were then caught in traps of their own making, and escaped as sorely crippled entities, if they survived at all. But by this time, the more privileged players had “taken their money and run.”

Probably without meaning to, the Los Angeles Times aptly summed things up with an article headlined “A New Great Depression? It’s Different This Time.” The aptness is if you interpret the headline as “The Depression is Different This Time” as opposed to “Things Are Different This Time.” The details will naturally differ from those of the 1930s, but the substance will remain the same. But the paper dismisses the popping of asset bubbles in housing and stocks as merely “disturbing parallels.” Working together, the Fed (and the modern J.P. Morgan) “saved” Bear Stearns, the modern Bank of the United States, thereby preventing a collapse of the banking system. International trade remains robust, at least for now. So things don’t seem to bad, at least to the Times.

But are things really that different almost 80 years later? For instance, the popping of major asset bubbles almost defines a recession by itself. And one can argue that the 1930s collapse of the banking system is the consequence, or reflection of the real economy, rather than its cause. So saving one insolvent institution isn’t going to prevent the unraveling of the rest of the system early in the new century. And yes, the international situation is okay, but that’s just because America is the cause, rather than the recipient, of global economic problems this time around; falling stock prices abroad are saying that foreign GDP growth will soon collapse as a result of America’s troubles.

In deciding whether or not we are headed toward depression, one needs to look at the substance of economic events, as opposed to the form. Some examples of the substance: 1) A post-war record level of home foreclosures headed to 1930s levels fueled by a similarly record collapse of home prices. 2) Several major “runs on banks” as investors begin to wake up to the fact that a lot of what passes for collateral is in fact worth very little. 3) A panicked Fed trying to head off a financial panic by simultaneously lowering interest rates and injecting money into the system.

And what’s worse, we are only in the early stages of the crisis. Last year, 2007, was the year that the mortgage market unwound. This year, 2008, will feature the collapse of major financial institutions, starting, but not ending, with Bear Stearns. Next year, 2009, will be the year when the problems make their way to the rest of the U.S. economy, including the still-buoyant industrial sector. By 2010, the recession (or worse) will be global.

Some take comfort in the fact that we haven’t yet seen soup lines, or 25% unemployment. But soup lines are merely an unnecessary (and hopefully unrepeated) appendage of the above. And anecdotal evidence suggests that many welfare agencies are now stretched to the absolute limit, meaning that new soup lines will appear if the system is tested just a bit more. And unemployment hasn’t risen because companies have so far chosen to cut health care and pension contributions rather than lay off workers. One can easily get to the 1930s 25% unemployment with a 0% headline unemployment rate – by assuming that half the work force will be “temps” working half time without fringe benefits.

But perhaps one of the better definitions of the modern 1930s was given in a previous article on this site – a two decade pullback in the American standard of living to the 1980s (the original took American consumption back to the 1910s). Such a pullback seems inevitable from the deleveraging and loss of wealth that is now taking place. Moreover, such a retreat would last for an extended period of time. That’s because we had the best of all possible worlds (relative to the true state of the global economy) for most of the past decade and half. The next decade and half will probably see the worst of all such worlds.

Regards,

Tom Au
The Daily Reckoning Australia

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6 Comments on "New Economy: The Modern 1930’s"

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Pete
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haha if only… it all sounds nice and jolly, but how accurate is comparing 2008 to the 1930’s? Things are different now…maybe they are much worse, maybe they are better. The world has online share trading, options trading, any number of crazy financial instruments…the US has practically criminal Fed bankers (not much has changed in the past decades there). But the US was much different back then. Think technology, consumerism, global markets (was everything made in China then??), global economies (was the USD the trading currency for everyone? Did China, or anyone really, have huge surpluses in USD then?), military… Read more »
Pete
Guest

A nice read though…

christina
Guest

Go to you tube, and you can actually see a video of actual footage from 1929, taken on the actual day the stock market crashed, and it shows everyone running aroung panicking.

Also, you gotta check out this you tube video:
1929 Stock Market Crash (Part 5)
You will freak out! It shows them all partying on New Years Eve in 1929 and they were all affluent and rich like people act now. Little did they know what was coming. Poor things.

christina
Guest

Hey I found the other one I was looking for to tell you all to watch on youtube. It shows the stock market on the day it crashed in 1929 and all the people trying to get in and the mad horrible panic. Watch it now! It’s on youtube under:

The Great Depression (Britannica.com)

Pete
Guest

Thanks Christina

caleb
Guest

HI
I feel there are many similarities. I was trying to find a graph or info on median australian property prices over the last centuary to hopefully show that for decades you can have no real increase of value (eg 1930-1960) but i cant find a source..help?

wpDiscuz
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