If it turns out we have two phases of back-to-back great recessions, as I have always maintained we will, we may come to see the whole thing as one more Great Depression, propped up in the middle by the Fed with a fake recovery — fake in that neither the Fed nor the federal government did anything to solve all the underlying problems that caused the first phase, those problems being the elements in common that make both phases a single protracted period of collapse.
Before you write that off as too extreme, I’d like you to think about the most widely recognized forces that came together in the US to create the Great Depression and the length of time the Depression spanned and compare that to the past decade.
The bursting of financial bubbles
The first event we tend to identify with the Great Depression was the collapse of banks due to the popping of huge financial bubbles, including, of course, the collapse of the stock market. Just like today, however, the problem was not just in stocks.
Long-term US bond yields had been declining for years in what was a long-term bond bull market. (As yields fall, bond prices rise.) Then, just as with today, yields suddenly climbed for several months leading up to the start of the Great Depression and then returned to falling again. A second and greater bond route slammed financial markets in 1931 when bond yields suddenly spiked up one percentage point (100 basis points). This coincided with the second big leg down in the stock market of the Great Depression. From there, lowering yields on treasuries became characteristic of the entire Great Depression. (See graph below.)
In the thirties, the worst jog in US bond yields was due to financial moves by parliament in Great Britain. Today it could be due to actions of congress with respect to freezing government debt limits and then suddenly taking the lid off, or it could happen if the Fed fails to deliver on its now-essentially-promised interest-rate cuts.
In 1929, the Federal Reserve raised interest rates several times in an attempt to cool the overheated economy and stock market, just as it did last year. By October, a powerful bear market had commenced, just as it did last year. On Thursday, October 24th 1929, a spate of panic selling occurred as investors began to realize that the stock boom was actually an over-inflated speculative bubble. Margin investors were being decimated as large numbers of stock investors tried to liquidate their shares to no avail.
Millionaire margin investors went bankrupt almost instantly when the stock market crashed on October 28th and 29th…. To make matters worse, many banks had invested their deposits in the stock market, just as they did in the crash that caused the Great Recession, causing these banks to lose their depositors’ savings as stocks plunged. Bank runs soon occurred when bank patrons tried to withdraw their savings from banks all at the same time. Major banks and brokerage firms became insolvent, adding more fuel to the stock market crash. The financial system was in shambles.
So many echoes reverberate from the time of the Great Depression to the present time of the Great Recession.
Stocks had ramped up as much as 20% a year throughout the decade of the roaring twenties to reach unprecedented highs, just as they’ve done now and at the start of the Great Recession. Stocks were thought to be safe because of the economic boom brought by the new paradigm of industrialization, similar to the new paradigm of tech and online business today.
People became overconfident about the ability of the market to sustain those high values to where economist Irving Fisher infamously commented at the time, “Stock prices have reached what looks like a permanently high plateau.” Because of this overconfidence in rising stock prices, stock brokers allowed investors to purchase with high marginal debt. Like it looks today:
The same margin debt that acts as an accelerator for the road up becomes just as much of an accelerant for the crash-and-burn afterward by forcing investors to sell to cover their debt.
The great housing-market collapse of the Great Depression
Another primal force taking the nation down in the Great Depression was the deflation of a housing bubble.
A decade before the 1929 stock market crash there was a booming real estate market in New York City that Assistant Professor Anna Scherbina says resembles the housing bubble of the 1990s and 2000s…. The prices for a typical Manhattan house increased 62% in a run up of the 1929 stock market crash and then lost 51% of that value by the end of 1933.
It is often assumed that the Great Depression was associated with both stock market and real estate shocks (e.g., Shiller 2006, Piazzesi, Schneider and Tuzel 2007), especially in light of the recent sub-prime financial crisis where parallels with the past are frequently drawn (Reinhart and Rogoff 2009).
The Manhattan housing-market collapse of the Great Depression lasted over a decade. It is generally believed — though some say it is not easily provable due to lack of data — that what happened in Manhattan appears to have been endemic for the United States as a whole. Facts do show the same size decline happened in Chicago.
I think it is readily demonstrable. For example, without a housing bubble there couldn’t have been the infamous National Mortgage Crisis:
The National Mortgage Crisis of the 1930s was a Depression-era crisis in the United States characterized by high-default rates and soaring loan-to-value ratios in the residential housing market. Rapid expansion in the residential non-farm housing market through the 1920s created a housing bubble inflated in part by ad hoc innovation on the part of the four primary financial intermediaries….
Furthermore, if there hadn’t been a mortgage crisis as a major part of the Great Depression there would be no Fannie Mae or FHA or Federal Savings and Loan Insurance Corporation (FSLIC) today because those programs/insitutions were created during the Great Depression as an answer to the National Mortgage Crisis that developed out of the 20’s housing bubble. (The FDIC was created back then, too, but due to bank troubles that were triggered as much by stock crashes that triggered runs on banks as by mortgage defaults.)
The four intermediaries differed in their preferred mortgage terms. Commercial banks, life insurance companies, and mutual savings banks typically offered 5-year balloon mortgages…. As with any bubble environment, borrowers and lenders alike expected asset prices to rise ad infinitum and tended to continually refinance at maturity, exposing themselves to the clear danger of default and resulting institutional insolvency in the event of tightened credit. S&Ls, on the other hand, tended to offer 11 to 12 year fully amortizing mortgages…. Between 1928 and 1933, home prices declined by nearly 25.9%
Sound familiar? Yet, back then lending institutions typically only risked covering 50% loan-to-value and, at most for about twelve years. How much worse, in that case, will the present situation be if that proved perilous? Yeah, we already went through this phase, but it doesn’t mean we are not about to do it again! After all, we love to rinse and repeat our failures. Some things you can tell just by looking at them are not going to go well:
2018 pushed us just over the edge into another housing market crash that is as certain to continue sliding as the house in this picture at the top of a bluff that is giving way.
The Carmageddon of the Great Depression
Believe it or not, the Great Depression even had its now Carmageddon, in spite of the fact that cars had barely been invented. Unstoppable deflationary forces spread through the economy in the thirties and were particularly notable in the auto industry. What had been literally a roaring decade for automakers like Ford in the 20s collapsed.
Widespread midwest crop failures
On the Great Plains, environmental catastrophe deepened America’s longstanding agricultural crisis and magnified the tragedy of the Depression. Beginning in 1932, severe droughts hit from Texas to the Dakotas and lasted until at least 1936. The droughts compounded years of agricultural mismanagement. To grow their crops, Plains farmers had plowed up natural ground cover that had taken ages to form over the surface of the dry Plains states. Relatively wet decades had protected them, but, during the early 1930s, without rain, the exposed fertile topsoil turned to dust, and without sod or windbreaks such as trees, rolling winds churned the dust into massive storms that blotted out the sky, choked settlers and livestock, and rained dirt not only across the region but as far east as Washington, D.C., New England, and ships on the Atlantic Ocean. The “Dust Bowl,” as the region became known, exposed all-too-late the need for conservation. The region’s farmers, already hit by years of foreclosures and declining commodity prices, were decimated.
Then, as now, widespread failure of agriculture due to weather conditions paralyzed the midwest economy as one of the worst forces to bombard the economy during the Great Depression, which had already begun. Farmers throughout the midwest began to go bankrupt. At that time it was the drought of the dust bowl; in the present time it is, ironically, unprecedented flooding in what might be called the mud bowl, as the number of farmers going bankrupt is, again, seing rapid rise due to crop failure, a challenge made worse by trade wars on agriculture.
Flooded cornfields along the Mississippi
Trade wars of the Great Depression and the Great Recession
And, finally, there was the president’s choice to encourage trade protectionism via tariffs as a way of saving US markets. This further damaged the global economy and the US economy.
Senators Smoot and Hawley
The Tariff Act of 1930, commonly known as the Smoot–Hawley Tariff … was an Act implementing protectionist trade policies sponsored by Senator Reed Smoot and Representative Willis C. Hawley and was signed into law [by President Hubert Hoover] on June 17, 1930.
The thinking among Congress and President Herbert Hoover was that by raising taxes on thousands of imports no matter what country they came from, the act would protect American farmers and secure the nation’s economy…. “Economists around the country argued to the Republican Congress that this would only hurt the world economy, and the United States economy….” Other countries responded to the United States’ tariffs by putting up their restrictions on international trade…. Global trade tanked 65%.
Why would we think it would be different this time? Once again, we rinse and repeat the mistakes of history. One can argue as much as they want about how much it is necessary or how much other nations deserve it, just as congress did back in the late 20’s, but the merit of the reasons for enacting tariffs don’t change how they are going to play out. A year into the present trade wars with the world, it should already be apparent that “trade wars are [not] easy to win.” The “enemy” does not just cower, cave in and do as you demand. In the protracted war, global damage does occur.
In 1928, just before the Great Depression began, Herbert Hoover, a businessman, had campaigned for president as a trade protectionist, promising to make America great by protecting its trade against global competition through the implementation of stiff tariffs. He loved tariffs. Hoover particularly promised “to help beleaguered farmers by increasing tariffs on agricultural products.” It was Hoover who enlisted congress to enact such tariffs. Hoover was a tariff man.
There are many reasons we have heard so many times lately that “History doesn’t exactly repeat, but it rhymes.” Don’t expect that all the same forces have to happen in the same order to turn the Great Recession into another Great Depression any more than it has to be the same names. There are a lot of kinds of “great.”
Conflict focuses on Mexican immigration
Speaking of farm troubles, it should come as no surprise that even immigration conflicts along the Mexican boarder became extremely more tense during the Great Depression, even to the point of focusing on children and particularly migrant farm laborers.
The Great Depression of the 1930s hit Mexican immigrants especially hard. Along with the job crisis and food shortages that affected all U.S. workers, Mexicans and Mexican Americans had to face an additional threat: deportation. As unemployment swept the U.S., hostility to immigrant workers grew, and the government began a program of repatriating immigrants to Mexico…. All in all, hundreds of thousands of Mexican immigrants, especially farmworkers, were sent out of the country during the 1930s — many of them the same workers who had been eagerly recruited a decade before….
Many found temporary stability in the migrant work camps established by the U.S. Farm Security Administration, or FSA. The FSA camps provided housing, food, and medicine for migrant farm families, as well as protection from criminal elements that often took advantage of vulnerable migrants. The FSA set up several camps specifically for Mexican Americans in an attempt to create safe havens from violent attacks.
A Depression Conclusion
We have had enough generations since the Great Depression to have forgotten its lessons, which may mean we are destined to repeat all the same mistakes (as it would appear we are doing), not just in terms of causing another depression, but in terms of how we go about attempting to fix it.
In terms of causes, this present depression/period of multiple recessions probably wouldn’t have come about if we had not stripped away all the banking and stock-market restrictions that developed out of the Great Depression, which were intended to safeguard us from another such episode. It did not take long, after stripping them away, to wind up, perhaps (time will tell) right back where we were then.
The Great Depression happened over the course of a decade. This one can, too. World War II turned out much worse than World War I. That, also, could turn out to be the case with great recessions/depressions. It may be enough that some parts, like the housing market collapse already happened a decade ago, or they may repeat themselves. This may be a depression made up of bookend recessions that had two stock market crashes and two housing market collapses, making it all the more worth in time of the monicker Great Depression II.
Looking at the broad brush strokes, I see a lot of similarities. People can argue that the details are different this time; but I’m not sure that matters any more than the fact that the photos of that depression were black-and-white, and this one will be digital-and-color. Well, it will matter in one way:
The devil is in the details. Next time, it may be!