Stock market slide

The Coffee Shop
21

“I don’t believe that policies made much difference in that case, and they won’t in this one either.”

Really?

During the 1930s we saw 50% of all banks fail between Jan 1930 and Mar 1933. Currently (Dec 2007 through Mar 2009) only 47 banks (0.5%) have failed. FDIC insurance is a significant reason we don’t see runs on banks anymore, depositors don’t lose their money, and banks maintain a higher deposit base from which to lend. The alphabet soup of programs being implemented by Treasury and The Fed have also been key in keeping major financial institutions from failing and maintaining a relatively sound financial system.

Great Depression unemployment ran 25%. We are currently around 8.5%. More importantly, unemployment insurance mitigates much of the economic impact of job loss.

Money supply was initially contracted during the Great Depression through higher interest rates and finally expanded by 17% in 1930. Since September of last year, we have increased the money supply by 140%. As a result (Monetarist view), price levels have increased ~0.6% since Dec 2007 compared to the 25% deflation seen in the early 1930s.

Taxes were raised during the Great Depression and state spending was cut. By contrast, current fiscal policy includes massive stimulus spending (twice as much as a percentage of GDP compared to the 1930s) implemented much earlier in the crisis and some tax cuts (Keynesian view). During the Great Depression significant government spending programs weren’t put in place until 1934 because of concerns of deficit spending. Until then all spending was offset by tax increases.

None of this guaranties that we won’t see the equity markets have a major leg down similar to the 1930s, although it is highly unlikely barring any unforeseen circumstances (like WWIII), but if it does, it will be for reasons completely different than those that caused the massive decline we saw back then.

Haim

22

During the 1930s we saw 50% of all banks fail between Jan 1930 and Mar 1933. Currently (Dec 2007 through Mar 2009) only 47 banks (0.5%) have failed.

Because they are being bailed out. There is no free lunch though.

FDIC insurance is a significant reason we don’t see runs on banks anymore, depositors don’t lose their money, and banks maintain a higher deposit base from which to lend. The alphabet soup of programs being implemented by Treasury and The Fed have also been key in keeping major financial institutions from failing and maintaining a relatively sound financial system.

They are certainly modifying what would “naturally” happen… ie they are keeping it from crashing in a hurry… but the “debt” still needs to get paid eventually.

Great Depression unemployment ran 25%. We are currently around 8.5%. More importantly, unemployment insurance mitigates much of the economic impact of job loss.

8.5% in Mar and growing every week. And unemployment compensation is way below their previous earnings for most people, and again… it is the government putting more expenses “on the card”.

By contrast, current fiscal policy includes massive stimulus spending (twice as much as a percentage of GDP compared to the 1930s) implemented much earlier in the crisis and some tax cuts (Keynesian view).

Again… this is a way to soften the rate of descent, but the fundemental imbalance that caused the crisis must still be corrected, one way or another. We cannot just wish it away.

Also, because of high deficit spending during the last 25 years, we are also in a poor position to be piling on more debt.

None of this guaranties that we won’t see the equity markets have a major leg down similar to the 1930s, although it is highly unlikely barring any unforeseen circumstances (like WWIII), but if it does, it will be for reasons completely different than those that caused the massive decline we saw back then.

I think the reasons are quite similar… massive financial fraud and speculation. And the “price” for these crimes and distortions must be paid. The government policies after the fact can only modify the time course of the payment (and who pays!)… and they do so by piling on additional debt… which must also be paid.

I’m not saying that altering the time course as they are doing is a bad thing… it certainly reduces the short term pain, and a sudden collapse could have very bad societal consequences that could be difficult to grow out of. And maybe you are correct that the policies at the beginning of the 30s were exactly in the wrong direction… they made the crash accelerate instead of slowing it down.

But on the other hand, it seems to me that the fundemental cause of the crisis we have now is at least as severe as the one leading to the GD… and our economy will be even less able to deal with it in the long term.