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Comparing The Great Depression To The Recent Recession
This is not the first time the American economy has faltered. American spending and credit debt have caused economic downfall before, many years ago in the 20’s and 30’s and again now in our current recession. The recession America is in now, mimics the great depression in many of the same aspects; through bad legislature, horrendous natural disasters and other economic hardships, consumer spending is still the root of the economic downfall. Unlike the past, the recession of today is faced with several different elements; student loans and lack of infrastructure projects. These differences may change the course of the recovery, and maybe not in a beneficial way.
Just like in the Depression, there are many contributors to the economic meltdown. One of the problems the country was facing in both instances, were the presence of America in a war. In the depression, World War 1 and 2 were going on and even though America did not participate until the end, the cost of supplies hurt the country financially, as well as financial help given to other countries that had a higher and longer participation. In present time, the cost of the war against terror has gone past all monies spent on war in the last 150 years, almost tripled. Both times, the war has plummeted the country into a deficit, this time around brought us deeper than anyone could have imagine. Not only was America affected by both the wars, the whole world had been bought to their knees and unable to handle emergencies. With the so much of the world fighting in these wars, the world as a whole had lowered stability and less cushion for emergency.
Like times of war, in both instances there were also other contributors that could not have been fore seen or controlled. In the years before the Great Depression, there were several natural disasters that caused financial hardships to many Americans and even the country as a whole. The great flood of 1927 put thousands out of a home as well as work. Through the heavy rains from the summer prior and heavier rains the following winter, many levees broke, flooding large areas up to 30 feet in some places. Further problems were brought on by the government blowing up levees in New Orleans to save the city from the same fate. In doing so, they flooded out most of St. Bernard and Plaguemans parish in Louisiana, causing more damage and loss. The flood caused over 400 million in property damage, as well as 242 lives lost in the eight states affected.
Dealing with the flood was enough for America to deal with, however Mother Nature did not seem to agree. While the rains were stacking the circumstances for the biggest flood this country has seen, Miami was hit with a hurricane that left most of southern Florida in a swamp. With the new way of buying and selling consumer credit, many Americans invested in the housing market. After the hurricane and the property were lost, the bonds and interest went along with it. Many Americans and businesses lost a lot of money with the Miami Hurricane. At the end of the year, Florida’s housing market crashed.
Like the depression, the recession proceeded a couple of natural disasters. Most remarkable was Hurricane Katrina that hit the Mississippi/Louisiana coast in late August 2005, as a category 5 hurricane. This Hurricane came in with a 25-30 foot storm surge wiping out 90 percent of the coastal towns affected, however most of the deaths and damage was caused by levee failure like in the great flood of 1927. After the great flood of Mississippi River years before, the Army Corp of Engineers was put in charge. They were found at fault later in a 2008 court ruling, however they could not be held financial reliable. Hurricane Katrina caused over 81 billion dollars in property damage, at least 1836 lives and misplaced over a million people. Lasting effects are still seen in this part of the country and some parts of New Orleans still have not be demolished, let alone rebuilt seven years later. A month later in the same year, another hurricane as a category three hit the coast of Texas causing another 5-10 billion in damage.
At the same time the country is hemorrhaging money, legislature is passed to make credit easier assessable to consumers, so the country saw a large rise in consumer credit. The purchasing of consumer credit was becoming a safer and more dependable investment option.
“In both eras, a boom in consumer credit was made possible by the invention of a new way to repackage and sell individual debt, in a financial marketplace. And in both eras, a world made possible by credit, came crashing down in a financial cataclysm” (Hyman, 2012 pg44).
In the early 1920’s, several laws were passed making credit more available to farmers and other cash strapped individuals that needed money. In 1923 congress passed The Agricultural Credit Act of 1923, as well as set up the Farm Credit System. These laws help make money more accessible for those in the farming community that would have otherwise been unable to by appropriating government funds.
In the mid thirty’s other laws to aid farmers in the ability to get loans were enacted, namely for the hardships of the Dust Bowl, also known as the “dirty thirties,” coined that name for the dust storms in the mid-west. With no attempts to stop soil erosion by farmers and years of drought, made the perfect climate for terrible dust storms that left prime land barren. The farmers were hit hard in this time and the government stepped in and created foundations to guarantee loans.
Beyond the laws enacted, banks and loan agencies played into America’s time of optimism, by introducing new ways to get larger scale loans called the balloon payment. In this style of loan, a person would pay off the interest first at a lower, slower rate until several years down the road, the payment would triple if not quadruple. All the debt was also being bought up by American consumers as a financial investment.
Before the present day economic meltdown, in 2007 there was extra rules added on to the Housing and Community Development Act of 1977 called the Community Investment Act. This additional add-on made it easier for lower income Americans to gain access to credit. This Act with several other credit bills passed, focused on putting loans in the hands of consumers that may could not afford to repay them.
Another bit of legislature that did not turn out well in both eras was bank bailouts. “Bailouts of failed firms are disproportionately more likely to fail again than bailouts in other vendor source” (Scholes, 2012). In 1933 Frank Roosevelt established the Home Owners Loan Corporation (HOLC) which swapped government bonds for past due mortgages held by lenders that were failing from the rise in consumer debt default. Present time bailouts involved several banks failure due to subprime and adjustable rate mortgages. Just like in the 20’s balloon payments, the lower payments gave consumers a sense of manageability, but like before, consumers defaulted. When the government bailed out the consumer credit debt, both times the whole economy felt it, country wide and even world-wide. In both cases, in times of hardship, the government bought the consumer debt by way of the bank, they are not just bailing the banks out, but the millions of Americans defaulting on loans.
Considering all the factors that have been similar in the two eras, one would conclude that it may end the same way. In the depression there was over a decade of economic hardship, followed by "four years of rapid growth in the economy, followed by another recession in 1937" (Scholes, 2012). If history repeats itself, we will still have many more years of economic hardships to contend with. Americans fear the state of the economy, as does the rest of the world. Like before so many years ago, the whole world has been affected by our economic problems and our over spending. Since the dollar is still the primary monetary used throughout the world, when Americans spending plummets, the world feels it. America is the biggest buyer in the world, so when they stop buying, businesses everywhere suffer. Also the shared efforts of both wars in both times, set the stage for the what followed.
Unlike the past though, this new economic crisis has a few main drawback that was unseen before; student loans. One of the pending dooms that hang over the head of every American is the mounting defaults to the ever growing number of student loans. As of today, there are over 750 billion dollars owed for student loans which are mostly backed by the government, over half are already default. "Evidence is mounting that student loans could be the next trouble spots for lenders" (Zywiki, 2012). The student loans looming are a different facet unique to the current financial crisis and their effects are yet to be felt, although it has been a major topic in recent “movements” sweeping the country.
Newer statistics show that the average American has over six thousand dollars in credit card debt alone. In 2006, Americans were also spending over 100 percent of their annual income. In history as in the present, credit becoming a large way of life for Americans will have catastrophic consequences. American consumers spend way more than they make and have/are using credit to pay for daily expenses. The only way for every economy to move forward is to like before, control spending and live within their means.
Another difference that may affect the outcome is the lack of infrastructure projects. Roosevelt knew that to get the economy going again, he needed consumers to spend money and to do that they needed jobs. The 40’s were a very productive time in our history and much of the infrastructure we have today is from Roosevelt’s infrastructure project coined by many as “The New Deal.” Many years have passed since most of the country’s infrastructure was built and now is becoming broken down and in need of improvements and repair. Needs aside, it also creates jobs, which is proven to jump start a sluggish economy. Although President Obama proposed many projects like those done after the Depression, congress is unable to agree enough to appropriate money. With no real jumpstart, the recovery of the country may be stalled and take longer to return to its glory.
With so many factors in common between the depression of the 20's and 30's and the one America is going through now, the causes cannot be zeroed to one thing, but many elements that set the stage. Natural disasters cannot be predicted or stopped, however consumer spending can be altered. In each instance the laws were changed to make credit more assessable, but as the past has shown us, it is not always the best bet.. People that cannot afford a loan should not be given one, it is that simple. The banks and government have helped makes matters worse, but to me it is clear the real culprit is consumer overspending and debt.