Archive for March 31st, 2008

Recognizing Parallels When they Slap You In the Face with a Haddock

Sharon March 31st, 2008

Nearly every financial report that discusses how bad the economic situation is going to be reports two facts.  1. Ben Bernanke is a student of the Great Depression, which means we’re safe from making the same mistakes twice.  2. Clearly, we aren’t in the same situation as the Depression, because after all, the situation isn’t the same.  Consider today’s essay in “Fortune” which repeats a mantra I’ve noticed over and over again - remember, things aren’t nearly as bad as in the Great Depression.

“No, Meltzer isn’t saying that a Great Depression - 25% unemployment, social unrest, mass hunger, millions of people’s savings wiped out in bank collapses - is upon us. Nor, for that matter, am I. But the precedent is unsettling, to say the least. You can only imagine how unsettling it is to Federal Reserve chairman Ben Bernanke, a former economics professor who made his academic bones writing about the Great Depression.”

This is supposed to reassure us - and, despite acknowledging the danger,  to point up the radical differences between the Depression period and the present.  And I suspect for some people it works.

The problem is, the parallel is a false one.  The statistics that the commentators are citing are statistics from deep in the middle of the Depression from 1933 when unemployment really was 25%, and they are holding them up against our present situation - at the very beginning of a financial disaster.  Observing that the Great Depression isn’t upon us isn’t very helpful, because at the comparable stage of the Great Depression, those things weren’t upon us either. 

For example, when the stock market crashed in October of 1929, a news report observed that “the vast majority of Americans remain unaffected.” Two months after the stock market crash, Secretary of the Treasury Andrew Mellon said, “I see nothing in the present situation that is either menacing or warrants pessimism.” 

Unemployment did not instantly rise to 25% - in March of 1930, it was 3, 250,000 (and this is some months after the crash).  By 1931, however, a year and a half into the crash, it had doubled to above 7,000.  By 1933 it would double again.  But again, at a parallel point in time, unemployment was comparatively reasonable (high by our present standards, but fairly typical for the period).

Meanwhile, those who were lucky enough to keep their jobs found themsleves at first in a decent position - as Don Lescohier reports in Common’s _History of Labor in the United States_ “The first impact of the Depression of the ‘thirties did not affect the wages structure.  It cut the earning of millions through unemployment and part-time work before it affected wage rates.  It was not until the last quarter of 1930 that appreciable downward changes in manufacturing wages occurred.”  Yet again, the first ripples in the financial centers didn’t actually translate right away.  But by 1932, wages in Ohio had fallen by nearly 60%.

In that sense, the current system may be worse than the Depression - while wages haven’t declined, buying power has declined much more precipitously than it did in a parallel period during the Depression.  For example, in the news today, food stamp use is approaching record highs - that is, while unemployment remains comparatively low and wages are still stable.  This is not a good sign. 

On the other hand, there are parallels we might want to look at.  For example, in Harper’s Magazine in 1933, a lawyer from Mason City, Iowa wrote about the housing bubble that preceeded the collapse,

“Farm prices shot sky high almost over night.  The town barber and the small-town mercahant bought and sold options  until every town square was a real estate exchange.  Bankers and lawyers, doctors and ministers left their offices adn clients and drove pell mell over the country to procure options and contracts upon this farm and that, paying a few hundred dollars down and expecting to sell the rights before the following March brought settlement day.  Not to be in the game marked on as an old fogy, while paper profits were pyramided and Cadillac cars and pleasure trips to the cities took the place of Fords and Sunday afternoon picnics.  Everyone then maintained that there was only a little land as fertile as the fields of Iowa, Illinois and Minnesota, and everyone ought to get his part before it was all goine.  Like gold, it was limited in extent and of great potential value.  Prices skyrocketed from $100 to $250 and $400 per acre without regard to the producing power of the land.

During this period insurance companies were bidding against one another for the privelege of making loans on Iowa farms at $90 or $100 or $150 per acre.  Prices of products were soaring.  Everyone was on the highroad, not only to comfort, but to wealth and luxury.  Second, third and fourth mortgages were considered just as good as government bonds.  Money was easy and every bank was ready and anxious to loan money to any Tom, Dick or Harry on the possibility that he would make enough in these trades to replay the loans almost before the day was over.”

I bet you thought we invented housing bubbles ;-) .  But again, the bust didn’t happen instantly.  There were foreclosures in 1929 to be sure, but the wave of property taking occurred primarily in 1931 and 1932. 

Right now the media is starting to warn that there “might” be a real Depression.  But they are quick to say that now isn’t much like 1929 - and we are buying it,  because most people’s relationship to historical events is pretty sketchy - when talking on a long historical scale, the fact unemployment really began to get bad 2 years after the stock market crash is a blurry fact, the difference of a typo in numbers.  Who cares whether it happened in 1930 or 1931, the depression is the depression.  But the thing is, if you were living it, watching things unfold, it looked to people just like it looks to us now - a few steps forward, some good news, a few steps back, a bit of bad news.  And in the interval between one piece of history (the stock market crash) and another (unemployment peaking) were four miserable years of life gradually sliding down.   We understand history in chunks, but we live in history day to day, and everyone who lives in history experiences it that way.  We forget that at our peril. 

Telling us that it isn’t as bad as the mid-point of the depression isn’t just useless, it is misleading, and intentionally so.  Compare the worst to the not so bad, and things don’t look that bad.  But compare where we are now to where we were at a comparable period of the Depression, and things begin to look worse - and more accurate.

I can only hope that Ben Bernanke is a better student than the people who write these articles.  But of course, he has even more incentive to tell us that things aren’t really so bad.