Not Just Another Recession – How This Economic Crisis Stacks Up

This is a guest post by Philip of Weakonomics. Philip is a twenty-something that works for one of the largest banks in the United States. Weakonomics believes education is the most powerful tool to fix the economic problems we face. The educated consumer can avoid the bad financial services, thus making them unprofitable. The educated citizen can make informed decisions when selecting elected government officials. The educated consumer relies only on themselves for financial support. Be sure to visit Weakonomics and subscribe to the feed for more information.

If you are a representative of generation X, I might look at you as an old fart. As a generation Y fellow myself, I haven’t yet conceived of the notion it is possible to have a life passed the age of thirty.

Since you were around during the Great Depression, I thought you might understand something a Columbia Business School professor pointed out on NPR better than my generational peers.

In the years leading up to the Great Depression the American public was very “debt happy.” More people were buying homes and investing in the stock markets than ever before. They were using borrowed money to do it too.

But the entire economy of the 1920′s was built on borrowed money. Gross Domestic Product, the most common measurement of our economic health, was around $100 billion (in today’s money) in 1929. According to Columbia professor David Beim, the total amount of debt owed in the country was also $100 billion. That means the amount of money we owed in this country was the same amount as our GDP.

Flash forward to 2007. In 2007 our GDP was more like $13 trillion. What is our debt situation like? $13 trillion. Once again the ratio of GDP to total debt is 100%. Does that terrify you? It should. The only times this has ever occurred was in 1929 and again today.

Now don’t fret just yet senior citizens. Half of what caused the Great Depression was the economic policy and weak government action that followed the crash and bank runs of the late 20s and early 30s. The financially struggling government was forced to raise taxes to keep their programs alive. So far our government today has been smart enough to avoid that bad call. Here are some other preventative measures we took that were all lessons learned from the Great Depression:

FDIC: Deposit insurance didn’t exist back then. People ran to the banks to pull their money out.
With literally no money banks closed overnight, and the credit markets froze.

Federal Reserve: The Fed didn’t exist back then. The free market raised interest rates at first so no one could afford to borrow money. Our Fed has swiftly cut rates to nearly 0%, making borrowing easier (though still difficult).

Regulation: In short there was none at all back then. So when everyone lost faith in the markets, they crashed hard. With the SEC, FDIC, Fed, OTS, and other regulating bodies, many of us still have faith that the system works.

Granted, I’m not here to tell you we’re going to be fine and dandy for your retirement in five years. What I wanted to illustrate was first the gravity of this recession, and secondly show you exactly how far we have come. I didn’t expect you to learn from all of your mistakes from last time, but you did learn from some. Just like I’ll learn from some of your mistakes this time and not repeat so many of them in another few decades.

Now if I can just figure out a way to avoid paying social security to support you old timers I’ll be all set.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

8 comments
Ekonomix
Ekonomix

Nice post.

The worst part of this recession is the huge budget deficits we will accumulate in the next 10 years.

Ekonomix
Turkish Economy Blog

Chris
Chris

There are plenty of arguments to support that FDR's programs that everyone loves so much did little more than prolong the depression and delay the recovery. The problem is and was too much and too easy credit. When overlevered business and people fail, the economic drop is breathtaking. Though it is politically palitable to "make it stop", throwing a bunch of money at failed businesses and people does little more than kick the proverbial can down the road.

Dan
Dan

The Federal Reserve was created in 1913. Many people believe that its role in expanding the money supply during the 1920s played a significant role in creating the depression. It is fine if you disagree with that, but it is factually incorrect to say that the Fed didn't exist in 1929.

Asa
Asa

The reason we ended up in the same mess is that a majority of people had no clue as to the histroy of how the Great Depression was created. Few knew that the environment before the GD was a Free market, concentrated wealth, trickle-down, supply sided economic theroy, and it failed horribly. There were no unions, no regulation, no reresentation for the working classes and you worked 15 hour days for less then a quarter.

It took 50 years of careful planning and policy to have such a stable economy that it seemed like nothing could take it down. Then in less then 20 years we dismantled every safe guard (Glass Sewall act) Deregualted every industry, Union busting, and returned to the same free market ideas that caused the GD and somehow expected things to go differently, and they didnt. The only thing that is keeping us from the bottom this time is the Government and the various safeguards put in place under FDR that were not yet removed. But of course we all work now 15 hour days with no over time for pentance of what we create, sound familiar??

Asa
Asa

Umm
A few points to clarify. One the X generation is not going to retire in a few years more like a decade and in my case probably 20 years or more. I am only 33 so I was not around during the great depression my grandmother was shes 90 the "greatest Generation". Also the current people carrying on with this current economic condition are the "Baby Boomers", bulk of them are in their late 50's! The Baby Boomer generation has quite frankly created this mess with their "live for today" attitude. Spend everything, horde anything, and screw you, mentality. My fellow x-gens and I have never wanted to accumulate personal debt, and I have gone to great lengths to prevent it. But its difficult as most people our age are wildly underpaid.

Rich
Rich

Do you not find it odd that we still ended up in a similar situation to 1929 DESPITE all the new government agencies (Fed, SEC, FDIC, etc) created since 1929?

Government agencies don't seem to be the solution and neither does "free market" seem to be the solution so what are we left with?

the weakonomist
the weakonomist

Andrew,

I know it's fun to attack people on the internet, I'm certainly guilty of it, but it's wise to make sure you've read the post carefully. I never said anything about national debt. This is personal debt. Maybe I should have clarified that better in the post.

I am guilty of trusting the Columbia professor, so if his numbers are wrong on personal debt please let me know. I will be happy to inform him of the error.

Andrew
Andrew

Just a quick problem I have with this post. The GDP has exceeded national debt more than just now and in 1929, but in the 1940s also. That deficit spending helped get the nation out of the great depression and helped to win World War II, and was followed by years of relative prosperity (as the nation chipped away at the imbalance through growth of productivity and increased taxes).

Please, tell your guest posters to fact check next time.