Are We Teetering On The Edge Of Depression 2.0?

The Economy In Depth

Inevitably, people watching the fast and furious fluctuations of the U.S. economy these days often evoke the possibility of another Great Depression. Just in October, TheStreet.com reported that TV moneyman Jim Cramer "believes the federal bailout plan can help, but that a second Great Depression is still on the table." And an editorial in the Peoria Journal Star asserts that the government has to do whatever is necessary "to pre-empt another Great Depression."

The top guns of the Federal Reserve and the Treasury Department appear on TV almost daily reassuring the country that steps are being taken to avoid an economy-shattering stock market crash. And yet...

What if we are on the precipice of what some call the Great Depression 2.0? What are the similarities, and the differences, between our decade and the 1920s — the decade that led up to what may become known as the First Great Depression?

Easy Credit

Here's a key point for those who say history is repeating itself: The American economy was fueled by easy credit in the 1920s.

Eric Rauchway, a professor of history at the University of California at Davis, says that between 1920 and 1929 the total volume of consumer debt rose from $3.3 billion to $7.6 billion, and real debt per household doubled.

"Americans were going more and more into debt to buy more big-ticket household items—cars, laundry machines and so forth," he says. "This was a novelty, driven by new ideas of what people needed."

This was the advent of consumerism. And widespread advertising. And celebrity culture: Some of the first American celebrities, such as Charles Lindbergh and Ernest Hemingway, came to center stage in the 1920s.

Now, according to a recent issue of U.S. News & World Report, the average American with a credit history owes more than $16,000, excluding mortgages. The personal savings rate (income minus spending and taxes) "has hovered close to zero for the past several years." A new Standard & Poor's survey finds that one in five credit card users in the U.S. is having occasional troubles paying credit card or loan balances every month.

And the admixture of consumerism, advertising and celebrity swirls around the planet.

Global Economy

As Americans were borrowing more and more to drive the economy of the 1920s upward, people the world over began borrowing money from America.

"There was a network of debt between countries," says Rauchway, author of The Great Depression and the New Deal: A Very Short Introduction. "But most importantly, much of this debt was owed eventually to creditors in the United States."

As a result, a lot of countries depended on continuing lending from the U.S. to keep them afloat while they tried to rebuild their economies after the damage of the Great War of 1914-18.

Today, national economies are intertwined. Other countries are lending money to the U.S., and America's domestic miasma is affecting the financial footing of many nations. (For instance, angry Asian investors gathered in Singapore a few days ago to ask the central bank to help them recoup lost savings that were tied to Lehman Brothers and other faltering financial institutions, according to AFP.)

The finance ministers from the Group of Seven leading industrial nations met in Washington recently to adopt a global strategy to deal with the worldwide financial meltdown.

"We are in this together and will come through this together," President Bush said.

Speculators Flourished

The 1920s "experienced a speculative bubble, built around easy credit," says Randall Parker, an economics professor at East Carolina University and author of Reflections on the Great Depression.

All of the financial innovations that were considered new at the time, such as installment credit and the ability to buy stocks on margin, Parker says, "brought people from the fringes into the market to keep the bubble going. People separated themselves from the fundamentals. And everybody believed that the sky was the limit."

In the 1920s, most everyone was saying that this was a new economy and all the old rules did not apply, Parker says. "We know from economic history — they said the same things in Japan in the 1980s and during the Internet bubble of the 1990s — that when you hear those words it is time to run like hell."

The same is true today, he adds. "People are saying that all the old rules don't apply. That it's a new economy. I say run like hell."

Responsive Government

But there are also indications that the U.S. has learned from its painful past.

The stock market imploded in October of 1929. Over the next four years, half of all U.S. financial institutions failed.

"The Fed sat idly by while the economy crashed and burned," Parker says.

Today, there are a number of agencies created in the wake of the crisis of 1929-1933 that are still in existence and doing their job, Rauchway says. For instance:

The Federal Deposit Insurance Corp. makes sure that when a giant bank fails — like Washington Mutual — depositors are protected and their accounts are covered up to a certain limit.

The Federal Reserve System, reconfigured by the Banking Acts of 1933 and 1935, is able to act quickly to prevent a high-finance crisis from becoming a credit-card crunch. Plus, there are Social Security, unemployment insurance and retirement pensions – none of which existed before the 1929 crash.

The Troubled Asset Relief Program (TARP) was swiftly formed to deal with the government's $700 billion bailout. According to Rauchway, the new relief program "closely resembles the Reconstruction Finance Corp., created while Herbert Hoover was president in January 1932, and which is acting much as the Reconstruction Finance Corp. did under Roosevelt — buying bank stock, trying to recapitalize banks and thaw the credit markets."

"And," Rauchway says, "you have a greater degree of international cooperation, though perhaps not as much as one would like. As you know the [Group of Seven] met to discuss the action, and if they didn't quite agree on a strategy there may be something there. By contrast, in the lead-up to the Great Depression, nations took a much more go-it-alone strategy."

As Henry Allen, author of What It Felt Like: Living in the American Century, puts it: "The 1920s were the beginning of the age of consumerism ... and the beginning of the age of celebrity."

What is happening now, he says, "seems to be the maxing out of consumerism and celebrity."

And as for what the next age will be? Allen says, "We have no idea."

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