Wednesday, September 17, 2008

Crisis As Bad As Great Depression Or Worse?

Nobel-prize winner and former chief economist of the World Bank, Joseph Stiglitz has warned that the current financial crisis will continue for at least another eighteen months and in many ways represents a worse situation than the one faced by Americans during the Great Depression of the 1930s.

“This is clearly the most serious problem since the Great Depression and in some ways worse in terms of the financial institutions.” Stiglitz commented, referring to the fact that lenders are unwilling to take risks to finance each other because they no longer have complete access to their own undertakings let alone those of other institutions.

MP: The chart above shows average annual bank failures by decade back to the 1930s, illustrating a few points:

1. Put in context, the S&L crisis of the 1980s and early 1990s was relatively mild compared to the banking crisis of the 1930s, in terms of average bank failures per year.

2. The banking crisis of the 1930s was so severe that more banks failed (4,000) in a single year (1933) than the sum total of all bank failures in the period since 1934 (3,566).

3. Most of the bank failures in the 1930s were in 1930-1933 period, when bank failures averaged almost 2,300 annually. Once FDIC was put in place, the average number of bank failures dropped to about 50 per year.

4. Unless it gets a lot, lot worse, any comparison of today's financial crisis to the 1930s seems like quite an exaggeration.

17 Comments:

At 9/17/2008 9:26 PM, Blogger KauaiMark said...

With this weeks news, it looks like the stats will be changing for the "2000's"

 
At 9/17/2008 9:28 PM, Blogger Chris said...

It does seem that less banks are failing, but the banks that are failing are quite large. How does their size equate with smaller bank failures in the past.

 
At 9/17/2008 10:00 PM, Anonymous EJ said...

chris,

you have to understand the difference between an investment bank like lehman brothers and bear stearns and banks that are depository institutions that the FDIC covers. So far there have only been a handful of bank failures and the only large one thus far was IndyMac, and that was partially caused by a deposit run started by Chuck Schummer when he purposely released a letter he wrote to a regulator which caused a panic. There are likely more to come, but the actual banking industry is is good shape in general to weather this storm. To compare for example, the banking industry has about twice as much equity capital as a ratio to assets as it did back in the 1980s and early 90's s&L crisis. Furthermore, banks are far more diversified now so they don't get crushed in one market. Its important to put this into perspective.

 
At 9/17/2008 10:25 PM, Blogger Dave Narby said...

Jumping the gun here.

This is going to take years to unwind.

The reason we aren't seeing a precipitous crash is that there are various firebreaks in place that weren't there in the 20's.

This will have the effect of slowing "The Great Unwind", and preventing a drastic overshoot to a severe oversold condition, but that's about it - Things still have to be marked to market.

More pain to come! News at eleven! And twelve! And again at one! Hell, every hour on the hour until they stop calling bottoms!

 
At 9/17/2008 10:26 PM, Anonymous QT said...

One cannot completely discount the comments of Joseph Stiglitz. AIG's collapse would have had repercussions across the entire global economy.

It is unlikely that we know the full extent of the problems. The problems of AIG did not simply arise last week any more than the Fannie & Fred situation.

A recent comment on PBS regarding the war in Iraq seems strangely appropriate "Most of what you hear in the news about Iraq is in fact wrong".

I believe that we will get through this because the team managing is very competent...Paulson, Bernanke, etc. thanks to the Bush administration. We will have something to worry about if Schumer & friends get control of the white house only foreign policy and economic issues.

My personal fear is that the cart will be driven by ideological populism rather than the comprehensive data. Obama will be the least experienced president in U.S. history. A man who plays both ends against the middle.

Bush may have lots of flaws but at least you have some idea what you are dealing with.

 
At 9/17/2008 10:46 PM, Anonymous Anonymous said...

This chart shows the absolute number and is quite interesting. What about a relative measure to adjust for differences in the industry over the decades. Any thoughts on this?

 
At 9/17/2008 10:59 PM, Anonymous David Blomstrom said...

"Bush may have lots of flaws but at least you have some idea what you are dealing with."

Yes - unrelenting stupidity and corruption. Which isn't to say I support Obama; frankly, I think he's just another corporate operative, similar to Al Gore, John Kerry, Nancy Pelosi, Bill Clinton - just about the entire Democratic Party. John McCain is even worse.

Which brings me to another observation. The comment about the "firebreaks" that protect us is well taken. But I would argue that they are to some extent countered by problems that didn't exist during the original Great Depression.

For starters, wouldn't it be accurate to say that the federal government is now much more corrupt than it was in the 1930's? I don't know that for a fact, but our government is amazingly derelict. I need to brush up on my history, but I think the socialist campaigns of the late 19th and early 20th century achieve most of their victories by the 1930's, didn't they?

In recent decades, corporate interests have been steadily eroding "socialist" gains. This is the era of deregulation, privatization and corporate socialism.

The world is also much more complex, more densely populated and more closely interwoven. Focusing only on banks while ignoring things like government corruption, job outsourcing, ongoing attacks on workers' salaries and benefits and on and on doesn't give us a complete picture.

It's a new ball game, and I doubt that anyone really knows how it will end, but the potential for the greatest economic disaster in world history is very real.

David Blomstrom

 
At 9/17/2008 11:17 PM, Blogger bobble said...

"Once FDIC was put in place, the average number of bank failures dropped to about 50 per year. "

so, a government program, created during the 'new deal', has saved our butts for the last 70+ years?

what gives, professor perry? i thought CD was against government involvement in business?

 
At 9/18/2008 2:24 AM, Anonymous Anonymous said...

Ah, Professor Dude, the great depression didn't play out in one week. I know you cannot fathom that things are approaching a catastrophic market event, but at least understand that the depression was a series of blunders that occurred one after another. We're seeing major blunders from the government over and over again. Expect MANY more to come.

And go read some Austrian economics. This Chicago school free-market pollyanna stuff is just terrible.

 
At 9/18/2008 6:12 AM, Blogger Walt G. said...

I don't think we can compare the economic system of the 2000s to the 1930s any more than we can compare WW I to Iraq (although Iraq is not a declared war). Any attempt to do so is more of an attempt at sensationalism than anything else.

Whatever we have now, whether you want to call it a depression, a recession, or a market correction is the biggest financial mess I have experienced in my half-century-plus-three lifetime. When we solve the problem with the private sector, we get to figure out how to solve the $500 trillion problem with the public unfunded liabilities and national debt. If you have any spare cash, you can send it to Uncle Sam and start whittling away your 1/300,000,000 of the bill. People better quit living over their heads and quit asking the government to supply that for which they can’t pay.

 
At 9/18/2008 7:42 AM, Anonymous qt said...

How very true.

 
At 9/18/2008 7:50 AM, Blogger Mark J. Perry said...

Bobble: FDIC has had both costs and benefits, like any government policy. It did obviously have positive effects on bank failures in the 1930s, but its flaws (flat-fee based premiums) surfaced later in the 1980s, and contributed to the S&L banking crisis (3,000 bank failures).

Deposit insurance has many benefits, but: a) it should be market-based, with risk-adjusted premiums like it now has, and b) it doesn't necessarily have to be provided by the government, it could be provided by private insurance companies.

 
At 9/18/2008 8:45 AM, Anonymous EJ said...

For instance, there is a private market for deposit insurance for deposits over the 100,000 limit, as well as a market for a number of states' state chartered credit unions.

 
At 9/18/2008 8:57 AM, Blogger Walt G. said...

Isn’t part of the problem now due to risk not being properly assessed and paid for by those who were making the profits? Some of my investments that went down in value were from having junk in my portfolio that I did not know about or get paid for. I don’t know about the rest of you, but my carefully-selected safe-and-solid investments turned into shoddy investments almost overnight.

 
At 9/18/2008 12:41 PM, Blogger bobble said...

MP: "Deposit insurance has many benefits, but: . . . it doesn't necessarily have to be provided by the government, it could be provided by private insurance companies."

like AIG? that would have worked out well.

the massive neglect of the regulations and/or deregulation itself we have experienced has left private financial solutions bankrupt across the board. when and if we get through this, MP, i hope you remember how totally helpless the free markets were to correct this disaster.

i'm not a big fan of regulation either. but totally free markets do not self correct. that is, self-correct without annihilation of the economy.

i hope all of you smug free marketeers who are watching your 401-k's disintigrate gain a little humility from this experience.

LOL, and, now, john mcbush is running around telling us what a mess the financial world is. he was one of the senators that voted to repeal glass-steagall. what a *#$&ing hypocrite.

 
At 9/18/2008 4:43 PM, Blogger juandos said...

"Whatever we have now, whether you want to call it a depression, a recession, or a market correction is the biggest financial mess I have experienced in my half-century-plus-three lifetime"...

Well walt g, did you sleep through the Carter years?...:-)

From Sweetness & Light: Bush, McCain Tried To Reform Freddie Mac...

 
At 9/18/2008 5:14 PM, Blogger Walt G. said...

"Well walt g, did you sleep through the Carter years?...:-)"

No, juandos, But I did work all the way through those years at two jobs. I was also fairly young then and starting out. I bought my first house when I was 22 in 1977, with a huge down payment. Consequently, I did not lose 3 years' of my current salary invested in my 401(k) in 11 months like I have since last October :)

This one's killing me, and I am using a well-diversified, well-established, buy-and-hold strategy. Next time, I'll just throw darts to pick my investments.

 

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