The Great Depression was occasioned by a tightening up of credit, and you're seeing a large tightening up of credit now.
(Also), the economy of the 1920s was largely driven by credit purchases, so you had a lot of Americans who were for the very first time learning to go into debt on a regular basis for household goods. Debt per person doubled over the 10 years leading up the great crash.
After the crash, a lot of people suddenly felt very uncertain. There was a plunge in consumer spending. So all of these industries that depended on people buying stuff that they didn't need and couldn't afford suddenly couldn't continue. Then those people are out of work, and they don't buy stuff on credit, either. So you got this downward spiral.
What is the government doing to head off a depression that it didn't do following the stock market crash of 1929?
The institutions we have left over from the New Deal are quick to recognize a crisis in a way that people were not quick to recognize a crisis after 1929.
(Federal Reserve Chairman) Ben Bernanke is a student of the Great Depression. He's intent on not making the same mistakes the Fed made in the late 1920s. He's intent on throwing some kind of fire wall to keep the high-level, high-finance crisis from being transmitted from the big banks and the rich people to the ordinary person.
That's in stark contrast to the people who were in charge of the Fed in the 1920s and '30s, who sort of shrugged their shoulders and said, `Well, bank failures are bad but this is how we get rid of bad banks.'
They really just got out of the way and let things fall over.
Are there similarities between the bailout that Treasury Secretary Henry Paulson is directing and actions taking during the Great Depression?
During the Hoover administration, they had the same problem (we have today) - that banks were failing because of credit problems. The government created something called the Reconstruction Finance Corp. in 1932, which was a big - for those days - bailout program for the banks. They had $2 billion to play with. In those days that was about 3.5 percent of gross domestic product, compared with today's $700 billion bailout, which is maybe 5 percent of GDP.
Hoover used the Reconstruction Finance Program principally to lend money to banks based on their distressed assets, which is very similar to what the original Paulson plan was going to do.
But they discovered after some months that this was not going to be adequate to contain the crisis - and that's the crunch point that we find ourselves at now.
In 1932, Hoover was unwilling to go the next step and buy up a whole bunch of bank stock to capitalize the banks. He was unwilling to do that with the money because he basically thought that was socialism. You hear people saying that today - but they're mostly not in the Bush administration, interestingly. They're mostly congressional Republicans.
So Wednesday, when Paulson released his to-do list, one of the things at the top was "buy bank stock." So now it looks like, therefore, he knows that he can't pull a Hoover. He knows he needs to go further.
Flash back to history: Once Hoover goes out and Roosevelt comes in, Roosevelt immediately does a bunch of things that Hoover wouldn't do. One of them is buy bank stock. So within the next year, the U.S. government is holding a billion dollars of bank stock, which amounts to about a third of all the capital invested in the banking industry in those days.
One of FDR's advisers made the claim, `We saved capitalism.' That gives you a good sense of what they were doing. It was not socialism. They were giving the banks capital so that the banks could go on doing what banks do. As long as people understand that now, they're probably more willing to act like Roosevelt.
But that's the test. Is Paulson, and whoever succeeds him come January, going to act more like Roosevelt and be more aggressive, or are they going to be hampered by ideological convictions, interparty strife or who knows what? ''
http://www.sacbee.com/103/story/1305598.html