Is today's recession a mirror image of the Great Depression

¶ … Recession a Mirror

recession has been making world headlines since early 2007, some calling it pending ("Fears Housing Crisis Could" 21) and others stressing its inevitability, while still others emphasize the fact that most presidential election years are accompanied by a recession economy. (Brummer 20) Either way the U.S. recession is occurring and is reflective of slowing home prices and reduced consumer confidence and therefore spending. These issues are the greatest economic issues and are very similar in nature to the occurrences of the Great Depression. Though it is not safe to say that the current recession and the Great Depression are exact mirrors of one another it is important to see the economy as something that cycles, in and out of good and bad times and can create a situation where, "history repeats itself." Some changes due to modern development of both economy and modern economic protections will be seen but this in no excuse not to take the situation seriously. The two issues that are somewhat different than the great depression situation are the growth of international economic interdependence and supposed safety net regulations and standards that are imposed mainly on banks. Despite any changes associated with development, from a historical standpoint, the great depression and today's recession are very much alike.

Some claim that the U.S. economic downturn will have a lesser global effect than the great depression because other economies are now gaining influence and are providing secondary or even primary support for other nations but this is not the opinion shared by all. ("There Will Be No" 20) the president of Countrywide the nations largest home lending company was clear in his expression of the eventuality of the recession, at the very beginning the period marked by falling home prices and lending concerns;

Falling home prices hurt homeowners psychologically and cause them to spend less, he said. "I've seen this movie before, and the ending of the movie always ends up in some form of recession," he said. "I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what's going to happen next." ("Fears Housing Crisis Could" 21)

The value of seeing the economy as something that fluctuates naturally is essential but when this is accompanied by individual concerns regarding inflated prices and reduced consumer confidence there will likely be dire consequences for the economy. The nation, and really the world should either look very hard at how to resolve consumer confidence and then do so (consumers are like ants) and then make changes or expect a repeat of the Great Depression.

Consumer Confidence and Spending/Recession-Depression

Very simply an economic recession is when the prices and world circumstances begin to change to such a degree that consumers become fearful and stop spending as much on things that are not essential. Consumers stop or are forced by the situation to stop borrowing because they are afraid that prices will change so much that they will not be able to pay back or the goods they financed will not be worth what they were when they borrowed for them. Prices tend to decrease during a recession but eventually decreases in price have the opposite effect, where goods are worth less than it costs to make or provide them and then businesses fail. When large numbers of consumers stop spending and borrowing, prices fluctuate even more, which if left uncontrolled then spirals into a depression (a recession lasting longer than a year) where so many companies lose money and close which creates even more instability in the market and less spending on anything that is not essential. This very simple explanation is actually a very simple explanation of the current economy and an exact replica (in simple terms) of the time leading up to and during the Great Depression. The U.S. has yet to experience a full scale depression in a fully globalized economy. If you look at the history, Badger for example describes the situation surrounding the Great Depression as one that actually helped in some international economies, but was fully realized in the U.S. An economic situation that effected everyone. "…in the United States, the depression blighted countryside and city, inner-city and suburb, old industries and new, blue collar and white collar workers. No region escaped." (Badger 14)

It must be noted that other U.S. economic fluctuations have seriously affected the global economy, even before there was a serious global network of interdependent economies, as we see today. One stark example is the U.S. depression that occurred between the two world wars and how this economic event dominoed across almost every nation in the world, markedly more so in places where dependant economies existed. (Rothermund) it is therefore essential that the current global population is fully aware of the potential cascading economic problems that might occur as a result of the current U.S. Recession, which by 2009 has been fully accepted as a reality, even though people are still reluctant to call it a depression.

"Misguided Economic Policies"

According to Mcelvaine, the cause of the depression and later recessions are often rooted in misguided economic policies. (298) This can be best explained when looking at the history and the present for comparisons in the present real estate market. Many people who lived through the Great Depression or who have studied it are concerned about the real-estate economy as it appears today, stating that current conditions mirror those that occurred just prior to the Great Depression. There has been a significant boom in prices, that allowed many to over-finance and overextend their debt, which many say will in turn create havoc when paper debt exceeds real value of real estate holdings. This situation is already occurring and debt has a very limited way of fluctuating in accordance with prices. Some say this is the source of lost consumer confidence as it occurred before the Great Depression and now, but of course there are other issues at work also. Housing is such an important mental and physical aspect of life, and a huge part of any families' investment. (Byrne, and Diamond 257) Housing is also a serious aspect of the economy, with a great deal of housing issues (finance, building ect.) determining how healthy or unhealthy the economy is. Mcelvaine, stresses that one precursor to the failure of the U.S. economy was fluctuations in prices of houses, as well as huge unemployment and other issues that caused massive numbers of foreclosures. (135, 162-166) This is something that is definitely happening in the U.S. today and will likely get worse as the economy loses even more jobs. When people stop spending companies fail or scale down and this creates hob losses, which results in inability to pay mortgages. Not to mention the mortgages themselves outstrip the consumers' ability to pay them for any length of time after a major reduction in income. Egan discusses this phenomena in a more personal way by talking about particular individuals who were in dire situations with regard to their mortgage payments, due to loss of income (293) but when you expand this phenomena to include many more people you see exactly what is happening today, consumers are to far in debt to survive job losses and business closing. (275)

Many are seeing such warnings plastered across the news today in the popular press and even spoken among experts in the lending and construction industries. ("Wells Fargo CEO: Housing evokes Great Depression…" NP) the fear being realized is that as the housing market levels off, the construction industry slows down and the market declines those who hold backward (sub prime) loans are stuck in a situation much like an auto loan, where the real value of their property is far less than the retail value of their home, and they are essentially paying for a dead horse for extended periods of time, until they can no longer do so. Many of these homeowners, like during the depression will lose their property all together, as real wages have not met the real estate boom and many homeowners are financed beyond their means. Simply said, housing prices went up so much that people refinanced to get the cash out of their homes and now they owe to much, and sometimes even more than their house is worth. (Byrne, and Diamond 257) Real wages have not in fact met the demands of the housing market for some time, causing many to refinance and increase their debt even more. (Egan 275)

Those who compare the situation now to that of the Great Depression are not really that far off, as the construction industry, as well as housing prices are in many ways mirroring the occurrence of the 1920s and 1930s, in addition to reduced consumer spending. Though it is arguable that there is a housing surplus, the cause of falling prices in the depression, the construction industry has slowed production, in response to potential losses and therefore these areas of growth are declining, creating less job opportunity and reduced demands for materials. "Construction -- which was a substantial component of investment -- fell because the housing stock exceeded the demand after 1925. " (Temin 9) Termin goes on to say that

Consumption fell because wages, other income, and capital gains all fell, with the fall in wages having the largest effect. Business investment fell because profits fell and -- to a lesser extent -- because the yield on equities rose. Residential construction fell because the stock of housing four years previously was high. Inventories fell because sales fell. But wages, profits, and sales all fell because consumption and investment fell." (Temin 49)

All of these cascading events could and to some degree are occurring today and the cascading effect will likely result in economic fears and realities, "…under freely-competitive capitalism, periods of boom and overproduction were followed by downturns which 'corrected' prior imbalances via falling prices" (Burkett 60) All of the economic events that occurred during the Depression are occurring today,

As banks withdraw credit, consumers and businesses hit by a loss of wealth and high debt burdens retrench on spending, precipitating an economic downturn. In the 1930s, worse came to worst, many banks failed, and a decade-long Great Depression ensued." ("Threat of Falling Market" A01)

Evoking Depression-era memories, Wells Fargo & Co. President John Stumpf a few months ago became the latest banker to predict continuing difficulties in the U.S. housing market as risky mortgages made to overextended borrowers disintegrate into large loan losses. ("Wells Fargo CEO: Housing evokes Great Depression…" NP) Stumpf goes on to say that housing and the lending market is worse than he has ever seen it and it mirrors the early stages of the Great Depression, when many circumstances, not the least of which was overextended families with large paper debt, upside down in mortgages are reeling during a decline in housing prices. ("Wells Fargo CEO: Housing evokes Great Depression…" NP) the occurrences are larger than one individual who might be able to save his or her family from utter loss, but there is a coming depression, the extreme of which we have yet to know.

When these issues dominate the minds of individuals and/or when they experience economic strife, such as unemployment, home foreclosure, business failures, reduced home value and even bankruptcy their spending habits become excessively different. Coupled with all these potential and real concerns are concerns about the increased cost of goods and services, which occurs during recession economies there is a potential for extreme economic change. Extreme economic change can then have extreme global impacts, especially in a cobweb of global interdependence.

It is not often common knowledge among everyday individuals how interdependent nations' economies are upon one another. Or even more importantly how much effect they have on the economy. Like I said before consumers are like ants, they are not completely able to see how their small part affects the big picture. Consumers making unwise decisions, supported by bad economic policy (Mcelvaine 265) and unregulated risky lending (Badger 72), are unaware how much they actually control the economy and caused the problem and how if they make better decisions in the future they might change the situation. This is likely a long time coming though and the economy is also likely to get much worse before then.

Most people even in trade businesses do not have a clear broad understanding of the effect that reduced consumer confidence in the U.S. And a resulting recession has on the demand for trade imports and/or exports or other exchange events at all.

Former Clinton Treasury Secretary Lawrence Summers…was & #8230;closer to the mark in a November 25 op-ed for the Financial Times in which he opined that "the odds now favor a U.S. recession that slows growth significantly on a global basis." Moreover, he warned, "there is the risk that the adverse impacts will be felt for the rest of this decade and beyond…(Jasper 10)