The Great Depression of 2008?

Gerald P. DwyerFederal Reserve Bank of AtlantaUniversity of Carlos III, Madrid

Who Is Speaking?

• These views are mine and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Questions

• Are we in a depression?• Are we at the beginning of a depression?• Is something like the Great Depression

likely to happen?

A Lot of Overwrought Discussion

• Associated Press report• “Retail sales fell off a cliff in September• plunging by the largest amount in three

years”• How much?• 1.2 percent

Not only reporters

• Joseph Stiglitz, a Nobel Prize winning economist, this Summer said the economy was in the worst recession “since the Great Depression”– “The Great Depression Hoax”, Wall Street Journal, Todd G.

Buchholz,

1/1/2007 4/2/2007 7/2/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008

Date

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elStock Exchange Indexes

January 2, 2007 through October 17, 2008

Wilshire 5000S&P 500NASDAQ

3/1/1995 3/1/1999 3/1/2003 3/1/2007

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Unemployment Rate

Unemployment RateJanuary 1995 through September 2008

Shaded bar: NBER Business Cycle Contraction

Other Developments

• $488 million cut in $7 billion S.C. state budget– Cuts for state universities especially

• Runs on money market funds

Run on Money Market Funds

• Money market funds are similar in some ways to banks– Generally give you back a dollar on demand

when you deposit a dollar in them– Prime Reserve fund failed to do that on

September 17, 2008– People started taking their funds out of money

market funds

Source: http://www.thetruthaboutmortgage.com

A Depression?

• “A repetition of the catastrophe of the Great Depression today is practically impossible….”

Gottfried Haberler, Prosperity and Depression, 1963, Preface

Source: http://sanddollaradventures.wordpress.com

Source: http://www.flatrock.org.nz

Pigs Flying and Depression

• Won’t say that a depression can’t happen– Won’t say that pigs can’t fly– What do we mean by “flying”?

• Will say that the economy definitely is not in a depression now

What Is A Recession?

• Business economists’ definition– Two quarters of real GDP decline

• National Bureau of Economic Research definition– A significant decline in economic activity spread across

the economy– Lasting more than a few months– Normally visible in real GDP, real income,

employment, industrial production, and wholesale-retail sales.

What Is A Depression?

• A severe recession• President Harry Truman – 1958

– A recession is when your neighbor loses his job– A depression is when you lose your job

• Dictionary– A period of low general economic activity marked

especially by rising levels of unemployment • About.com

– A 10 percent decline in real GDP

What Is A Good Definition of a Depression?

“There is no sharp dividing line between depression and recession; recession simply denotes a mild depression.”

Gottfried Haberler, Prosperity and Depression, 1963, Preface

Great Depression of 1929-1933

• May have been the most severe in U.S. history

• Real Gross Domestic Product fell by a third• Prices fell by a quarter or more• Stock prices fell by 75 to 90 percent

1928 1930 1932 1934 1936 1938 1940 1942Year

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Indu

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Industrial Production in the U.S.January 1929 to December 1941

1928 1930 1932 1934 1936 1938 1940 1942Year

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CP

IConsumer Price IndexJanuary 1929 to December 1941

1930 1934 1938 1942Year

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cent

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abor

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official rate'corrected' rate

Unemployment Rate1929 to 1943, United States

3/1/1995 3/1/1999 3/1/2003 3/1/2007

Date

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Perc

ent o

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Unemployment RateJanuary 1995 through September 2008

Shaded bar: NBER Business Cycle Contraction

1930 1934 1938 1942Year

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Per

cent

of l

abor

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official rate'corrected' rate

Unemployment Rate1929 to 1943, United States

What Caused the Great Depression?

• Repeated runs on the banking system– Federal Reserve dealt with them poorly

• Other policies were not so great– Repeated attempts to try to patch financial

system– Increases in taxes– Smoot-Hawley tariff

• May even have contributed to the stock market crash

Current Problems

• Banks are not sure which other banks are solvent– Banks not lending to each other– Makes it harder for a bank to be sure it will have funds

• Difficulty valuing some securities related to mortgages– Troubled securities – toxic securities– Hard to know which firms are solvent and which are

not

Current Policies

• Federal Reserve is lending reserves to banks• Troubled securities

– Federal Reserve has been taking troubled securities as collateral and lending Treasury securities to financial institutions

– Treasury will be buying some troubled securities– Treasury will be providing insurance on some troubled

securities– Treasury is buying preferred stock in some banks

1928 1930 1932 1934 1936 1938 1940 1942Year

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Indu

stria

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Industrial Production in the U.S.January 1929 to December 1941ipip

1930 1934 1938 1942Year

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Per

cent

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abor

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official rate'corrected' rate

Unemployment Rate1929 to 1943, United States

Great Depression WasVery Persistent

What Made the Great DepressionSo Persistent?

• Had the laws of supply and demand been repealed?

• The government– Organized firms to raise prices– Organized workers to raise wages– Introduced price supports for firms– Raised tax rates frequently

Depression in U.S.?• Does the economy reflect difficulties that are liable to

persist for a while?– Yes

• Are we in a depression?– NO!

• Could we have a depression?– There is little reason to predict one at this point

• Could we have another Great Depression?– Would require dramatic policy errors– “A repetition of the catastrophe of the Great Depression today is

practically impossible….” – Gottfried Haberler