The Great Depression, 2008

Are we on the brink of another Great Depression? Are the economic events of summer and fall 2008 mirror-imaged to those of the summer and fall of 1929?

It’s a good question. I’m not an economist, but as an American historian I can draw some comparisons:

1. Of course, things didn’t just go sour in 1929. For a good decade the American economy had been expanding too rapidly, as the newly invented credit industry took off. For the first time Americans were buying big-ticket items on monthly installment plans. Why? Because of electricity. New appliances, ranging from washing machines to vacuum cleaners to radios, lamps, and toasters were on the market for the first time, and people had to have them. Car ownership was also growing rapidly.

The parallel? Our “electricity” is the new financial markets, created by and for Wall Street, which allowed banks and other financial firms to invent all manner of complicated and very fishy deals, from credit swaps to loan bundling. The difference is that Americans in the 1920s may have been making manufacturers and banks rich, but they were also getting some value from the deal–those new labor-saving and entertainment-making inventions. Today, the average American saw no benefit from Wall Street’s risky endeavors.

2. In the 1920s, the U.S. government was loathe to intervene in the economy, even as signs of unsustainable growth became apparent. And once the crash came, the government still hovered, waiting for it to turn out to be yet another temporary panic.

The parallel is that since the Internet boom of the 1990s, the U.S. government has refused to intervene to stop the Internet bubble, the housing bubble, the CEO pay bubble, the Dow-at-15,000 bubble, or the rampant fraud on Wall Street. In the 21st century, experts were all sure that another Great Depression simply could not happen.

3. In 1929, ruined business were allowed to die. The economy was allowed to go into critical condition. FDR instigated a recovery, but not by breathing new life (through money) into failed businesses, but by creating a whole new world of federal jobs.

The parallel here is that there is no parallel. Today, Wall Street is repeatedly described as “too big” to let it fail. We cannot let these banks go bankrupt. No correction can be allowed; Wall Street must be allowed to continue its ruinous ways, for no apparent reason.

Perhaps Americans today are unwilling to suffer like their grandparents did. But were Americans in 1929 really “willing” to suffer 10 years of misery? No. They weren’t willing, but they accepted it as inevitable. And the government made that easier to do, by refusing to offer an alternative. And the market eventually corrected, and improved, and was more sound.

That could happen in 2008. It isn’t likely, though; too many powerful people have too much to lose, and too many average Americans have too little say. The Great Depression of the 21st century, if it is coming, will not come quite yet. Check back in 2009.