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Sunday, June 5, 2011

The Great Recession vs. The Great Depression

The over day I read this article about the city of Oakland being on the brink of closing several city libraries. As someone who grew up going to local libraries and still has a love of reading, I began to wonder how this would affect young people today.

Almost daily I’m reading about things I never even dreamed were possible when I was young: Firefighters and police officers facing layoffs, the closure of as many as 70 of California’s 280 state parks, an absolute glut of available office space everywhere you look, adult children having to move back in with their parents. It’s all quite overwhelming.

I always figured that this Great Depression stuff was ancient history, no need for me to give much thought to it. Well, all of a sudden I have quite an interest in those desperate years. What, I wonder, are some of the lessons we should have learned and can still possibly learn for the future?

Causes of the Great Depression

1. The Stock Market Crash of 1929

2. Bank Failures – Throughout the 1930’s over 9,000 banks failed.

3. When the fear of an uncertain future hangs in the air, everyone tightens their belt. As spending slows down, manufacturers stop producing goods, which leads to a reduction in work.

4. As businesses began to fail, the government created the Smoot-Hawley Tariff in 1930 which unfortunately led to higher taxes for imports. This in turn led to a reduction in trade between America and foreign countries.

5. The Dustbowl conditions of the 1930’s(think Grapes of Wrath) in the Mississippi Valley led to many farmers having to sell their farms for little or no profit.

Not to mention that back then there were no pensions, no retirement plans, no unemployment benefits and no Social Security benefits to fall back on.  The Great Depression was truly a struggle just to survive.

While not nearly as devastating as the Great Depression, the Great Recession is nonetheless nothing to sneeze at.

Causes of the Great Recession

1. Low interest rates the mid 2000’s helped created the housing bubble. Many investors got carried away and took advantage of these low rates and bought homes just to resell them.  Others bought homes they couldn't afford thanks to interest-only loans, “liar” loans and “pick a payment” loans.

2. Later in the decade higher interest rates kicked in, housing prices declined and many new homeowners were caught in a bind.. Foreclosure rates skyrocketed and panicked many banks and hedge funds who had bought mortgage-backed securities and now realized they were facing huge losses.

3.  Credit markets froze as banks became afraid to lend to each other because they didn't want these toxic loans as collateral. In order to stave off catastrophe the federal government instituted a $700 billion bailout in hopes of shoring up a flagging economy.

4. Bankruptcies of  Bear Stearns, Lehman Brothers, IndyMac Bank, and Washington Mutual along with the government nationalization of, AIG, Fannie Mae, Freddie Mac, created a full on financial crisis. By the late 2000s,  unemployment was climbing.

5. Major ratings agencies i.e. Moody’s, Standard and Poor’s and Fitch’s were guilty of gross misjudgments as best, outright corruption at worst.

Almost everyone knows someone who has lost either a home or a job (or both) since 2008.

What affect did living through the Great Depression have on those who went through it?

Some of those who lived through the Depression feel that it instilled in them the importance of planning for the future, to live well within their means, save the rest and not waste anything. Not surprisingly, many of them never outgrew a distrust of banks. Coming out of the depression with a more conservative mentality in general would be practically inevitable.

Even though it was clearly the worst of times many felt that it brought out the good in most because people had to rely on each other. I have to believe that people were either happier then or at least they had a greater sense of managed expectations. In other words it had to be much easier back then to be satisfied with the little things in life. 

One consistent theme both in the 1930s, and true today is the necessity to learn new ways to make money. Bootlegging, picking fruit and cotton, selling apples, cooking, building and repairing items were popular avenues of earning income during the Depression. This article outlines a few of the measures people are taking today to weather today’s great recession.

What long lasting affect(s) will the Great Recession of 2008 and beyond have on us? How will it change our relationship with money and financial decisions? How will this latest economic downturn affect our collective expectations of home, family, government, education, and the American Dream? Have you developed an attitude of frugality?

Although I vehemently disagree with much of the government’s decision to use our tax money to rescue banks, if it actually kept us out of another Depression, then I’m for it. 

From all I’ve read and heard we don’t ever want to go back there.

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