Underneath the Happy Talk, Is This As Bad as the Great Depression?

→Washington’s
Blog The following experts have – at some
point during the last 2 years – said that the economic crisis could
be worse than the Great Depression:

• Fed Chairman Ben
  Bernanke

• Former Fed Chairman Alan
  Greenspan (and see this
  and this)

• Former Fed Chairman Paul
  Volcker

• Economics scholar and former Federal Reserve Governor
  Frederic
  Mishkin

• The
  head of the Bank of England Mervyn
  King

• Nobel
  prize winning economist Joseph
  Stiglitz

• Nobel prize winning economist Paul
  Krugman

• Former Goldman Sachs chairman John
  Whitehead

• Economics professors Barry
  Eichengreen and and Kevin H. O’Rourke (updated here)

• Investment advisor, risk expert
  and “Black Swan” author Nassim
  Nicholas Taleb

• Well-known PhD economist Marc
  Faber

• Morgan
  Stanley’s UK equity strategist Graham
  Secker

• Former
  chief credit officer at Fannie Mae Edward
  J. Pinto

• Billionaire investor George
  Soros

• Senior
  British minister Ed
  Balls

How
could that possibly be, when the stock market has largely
recovered? (Let’s forget for a moment that the stock market rallied
after 1929, but then crashed
in a double dip). To find out, we’ll look at a couple
comparisons to get an idea of what is going on in the
rest of the economy. And then we’ll compare
the government’s efforts in the 1930s to today. Housing Crisis
Rivals Great Depression As I noted
last month, the current real estate slump rivals the Great
Depression:

Zillow’s Stan Humphries said:

The length and depth of the current housing
recession is rivaling the Great Depression’s real
estate downturn, and, with encouraging signs fading, will easily
eclipse it in the coming
months.

During the Great
Depression, home prices fell 25.9
percent in five years. The U.S. housing market is now
down around 25
percent from its peak in 2006. As housing price expert
Robert Shiller pointed
out in September 2008:

Home price
declines are already approaching those in the Great Depression,
when they plunged 30% during the 1930s [i.e. over a 10-year
period]. With prices already down almost 20%, it’s not a stretch to
think we might exceed that drop this time
around.

As I wrote
in December 2008:

In the greatest financial
crash of all time – the crash of the 1340s in Italy …. real
estate prices fell by 50 percent by
1349 in Florence when boom became bust.How does that
compare to 2001-2007? The
price of Southern California homes is already
down 41% [that was before the
first-time homebuyer credit, Hamp and other governmental programs
temporarily boosted prices]. Southern California hasn’t fallen as
fast as some other areas, and we’re nowhere near the bottom of the
market. Moreover, the bubble was not confined to the U.S. There was
a worldwide bubble in real estate. Indeed, the
Economist magazine wrote
in 2005 that the worldwide boom in residential real estate prices
in this decade was “the biggest bubble in
history“. The Economist noted that – at that time –
the
total value of residential property in developed countries rose by
more than $30 trillion, to $70 trillion, over the past five years –
an increase equal to the combined GDPs of those nations.
Housing bubbles are now bursting in China, France,
Spain,
Ireland,
the United
Kingdom, Eastern
Europe, and many
other regions.

And
the bubble in commercial real estate is also
bursting world-wide. See this.

In
addition, the percentage of Americans who owned houses during the
1930s was much
lower than today, which means that a larger portion of
the public is being hurt from falling home prices today as compared
to the Great Depression.

Meredith
Whitney, Nouriel
Roubini (and here), Zillow,
Case-Shiller
and even S&P
have been calling a double dip in housing. States and Cities In
Worst Shape Since the Great Depression States and cities are in
dire
financial straits, and many may default in 2011.
California is issuing IOUs for only the second
time since the Great Depression. Things haven’t been this
bad for state and local governments since the 30s. Loan Loss Rate
Higher than During the Great Depression In October 2009, I reported:

In May, analyst Mike Mayo predicted
that the bank loan loss rate would be higher than during the Great
Depression. In a new report, Moody’s has just confirmed (as summarized
by Zero Hedge):

The most recent rate of bank
charge offs, which hit $45 billion in the past quarter, and have
now reached a total of $116 billion, is at 3.4%, which is
substantially higher than the 2.25% hit in 1932, before peaking at
at 3.4% rate by 1934.

And see this.
Here’s a chart summarizing the findings: (click
here for full chart).

Indeed, top
economists such as Anna Schwartz, James Galbraith, Nouriel Roubini
and others have pointed out that while banks faced a
liquidity crisis during the Great Depression,
today they are wholly insolvent. See this,
this,
this
and this.
Insolvency is much more severe than a shortage
of liquidity. Unemployment at or Near Depression Levels USA Today
reports
today:

So many Americans have been jobless for
so long that the government is changing how it records long-term
unemployment.

Citing what it
calls “an unprecedented rise” in long-term unemployment, the
federal Bureau of Labor Statistics (BLS), beginning Saturday, will
raise from two years to five years the upper limit on how long
someone can be listed as having been jobless.

***

The
change is a sign that bureau officials “are afraid that a cap of
two years may be ‘understating the true average duration’ — but
they won’t know by how much until they raise the upper limit,” says
Linda Barrington, an economist who directs the Institute for
Compensation Studies at Cornell University’s School of Industrial
and Labor Relations.

***

“The BLS doesn’t make such
changes lightly,” Barrington says. Stacey Standish, a bureau
assistant press officer, says the two-year limit has been used for
33 years.

***

Although “this
feels like something we’ve not experienced” since the Great
Depression, she says, economists need more
information to be sure.

The following chart from
Calculated
Risk shows that this is not a normal spike in
unemployment: As I noted
in October:

It is difficult to compare current
unemployment with that during the Great Depression. In the
Depression, unemployment numbers weren’t tracked very consistently,
and the U-3 and U-6 statistics we use today weren’t used back then.
And statistical “adjustments” such as the “birth-death
model” are being used today that weren’t used in the
1930s. But let’s discuss the facts we do know. The Wall Street
Journal noted
in July 2009:

The average length of unemployment
is higher than it’s been since government began tracking the data
in 1948.

***

The job losses are also now
equal to the net job gains over the previous nine years, making
this the only recession since the Great Depression to wipe out all
job growth from the previous expansion.

The
Christian Science Monitor wrote an article in June entitled, “Length
of unemployment reaches Great Depression levels“. 60
Minutes – in a must-watch
segment – notes that our current situation tops the Great
Depression in one respect: never have we had a recession this deep
with a recovery this flat. 60 Minutes points out that unemployment
has been at 9.5% or above for 14 months. Pulitzer Prize-winning
historian David M. Kennedy notes in Freedom
From Fear: The American People in Depression and War,
1929-1945 (Oxford, 1999) that – during Herbert
Hoover’s presidency, more than 13 million Americans lost their
jobs. Of those, 62% found themselves
out of work for longer than a year;
44% longer than two years;
24% longer than three years; and
11% longer than four years. Blytic
calculates
that the current average duration of unemployment is some 32 weeks,
the median duration is around 20 weeks, and there are approximately
6 million people unemployed for 27 weeks or longer. Moreover,
employers are discriminating
against job applicants who are currently unemployed,
which will almost certainly prolong the duration of joblessness. As
I noted
in January 2009:

In 1930, there were 123
million Americans.

At the height of the Depression in 1933, 24.9% of
the total work force or 11,385,000 people, were
unemployed.

Will unemployment
reach 25% during this current crisis?

I don’t know. But the
number of people unemployed will be higher
than during the Depression.

Specifically, there are currently some 300
million Americans, 154.4
million of whom are in the work force.

Unemployment is expected to
exceed 10% by many economists, and Obama “has warned that the
unemployment rate will explode to at least 10% in 2009”.

10 percent of 154 million is
15 million people out of work – more than during the Great
Depression.

Given that the broader U-6 measure of
unemployment is currently around 17%
(ShadowStats.com
puts the figure at 22%, and some put
it even
higher), the current numbers are that much worse. But it
is important to look at some details. For example, official Bureau
of Labor Statistics numbers put U-6 above 20% in
several states:

• California: 21.9

• Nevada: 21.5

• Michigan 21.6

• Oregon 20.1

In the past year, unemployment has grown the fastest in the mountain
West. And certain races and age groups have gotten hit
hard. According to Congress’
Joint Economic Committee:

By February
2010, the U-6 rate for African Americans rose to 24.9
percent.

34.5%
of young African American men were unemployed in October 2009.As
the Center for Immigration Studies noted
last December:

Unemployment rates for
less-educated and younger workers:

• As of the
  third quarter of 2009, the overall unemployment rate for
  native-born Americans is 9.5 percent; the U-6 measure shows it as
  15.9 percent.
• The unemployment rate for
  natives with a high school degree or less is 13.1 percent. Their
  U-6 measure is 21.9 percent.
• The unemployment
  rate for natives with less than a high school education is 20.5
  percent. Their U-6 measure is 32.4 percent.
• The unemployment rate for young native-born Americans
  (18-29) who have only a high school education is 19 percent. Their
  U-6 measure is 31.2 percent.
• The unemployment
  rate for native-born blacks with less than a high school education
  is 28.8 percent. Their U-6 measure is 42.2 percent.
• The unemployment rate for young native-born blacks
  (18-29) with only a high school education is 27.1 percent. Their
  U-6 measure is 39.8 percent.
• The unemployment
  rate for native-born Hispanics with less than a high school
  education is 23.2 percent. Their U-6 measure is 35.6
  percent.
• The unemployment rate for young
  native-born Hispanics (18-29) with only a high school degree is
  20.9 percent. Their U-6 measure is 33.9 percent.

No wonder Chris Tilly – director of
the Institute for Research on Labor and Employment at UCLA – says
that African-Americans and high school dropouts are experiencing
depression-level unemployment. And as I have previously noted,
unemployment for those who earn $150,000 or more is only 3%, while
unemployment for the poor is 31%. The bottom line is that it is
difficult to compare current unemployment with what occurred during
the Great Depression. In some ways things seem better now. In other
ways, they don’t. Factors like where you live, race, income and age
greatly effect one’s experience of the severity of unemployment in
America. In addition, wages have plummeted
for those who are employed. As
Pulitzer Prize-winning tax reporter David Cay Johnston
notes:

Every 34th wage earner in America in
2008 went all of 2009 without earning a single dollar, new data
from the Social Security Administration show. Total wages, median
wages, and average wages all declined

….

And see this,
this,
and this.
Food Stamps Replace Soup Kitchens 1
out of every 7 Americans now rely on food stamps. While
we don’t see soup kitchens, it
may only be because so many Americans are receiving food
stamps. Indeed, despite the dramatic photographs we’ve
all seen of the 1930s, the 43 million Americans relying on food
stamps to get by may
actually be much greater than the number who relied on
soup kitchens during the Great Depression. Inequality Worse than
During the Great Depression I recently reported that inequality
is worse than it’s been since 1917:

Most
mainstream economists do not believe there is a causal
connection between inequality and severe downturns.But
recent studies by Emmanuel Saez and Thomas Piketty are waking up
more and more economists to the possibility that there may be a
connection. Specifically, economics professors Saez (UC Berkeley)
and Piketty (Paris School of Economics) show that the percentage of
wealth held by the richest 1% of Americans peaked
in 1928 and 2007 – right before each crash:
As the Washington Post’s Ezra Klein
wrote
in June:

*** Krugman says that he used to dismiss talk
that inequality contributed to crises, but then we reached Great
Depression-era levels of inequality in 2007 and promptly had a
crisis, so now he takes it a bit more seriously…

Robert Reich has theorized
for some time that there are 3 causal connections between
inequality and crashes …. Reuters wrote
an excellent piece on the issue of inequality and crashes
(discussing the first three factors) last month:

Economists are only beginning to study the parallels between the
1920s and the most recent decade to try to understand why both
periods ended in financial disaster. Their early findings suggest
inequality may not directly cause crises, but it can be a
contributing factor.

***
Inequality is actually worse now than it’s been since
1917.

The War Isn’t Working Given the above facts, it
would seem that the government hasn’t been doing
much. But the scary thing is that the government has
done more than during the Great Depression, but the economy is
still stuck a pit. Specifically, many economists credit World War
II with getting us out of the Depression. (I disagree, but that’s
another
story). This time, we’ve been at war in
both Iraq
and Afghanistan
far longer than we were in World War II. But our economy is still
stuck in a rut. Moreover, the amount spent in emergency bailouts,
loans and subsidies during this financial crisis arguably dwarfs
the amount which the government spent during the New Deal. For
example, Casey Research wrote
in 2008:

Paulson and Bernanke have embarked on
the largest bailout program ever conceived …. a program which so
far will cost taxpayers $8.5 trillion.

[The updated, exact number can
be disputed. But as shown below, the exact number of
trillions of dollars is not that important.]

So how does $8.5 trillion dollars compare with
the cost of some of the major conflicts and programs initiated by
the US government since its inception? To try and grasp the
enormity of this figure, let’s look at some other financial
commitments undertaken by our government in the past:

As
illustrated above, one can see that in today’s dollar, we have
already committed to spending levels that surpass the
cumulative cost of all of
the major wars and government initiatives since the American
Revolution.

Recently, the
Congressional Research Service estimated the cost of all of the
major wars our country has fought in 2008 dollars. The chart above
shows that the entire cost of WWII over four to five years was less
than half the current pledges made by Paulson and Bernanke in the
last three months!

In spite
of years of conflict, the Vietnam and the Iraq wars have each cost
less than the bailout package that was approved by Congress in two
weeks. The Civil War that devastated our country had a total price
tag (for both the Union and Confederacy) of $60.4 billion, while
the Revolutionary War was fought for a mere $1.8 billion.

In its fifty or so years of
existence, NASA has only managed to spend $885 billion – a figure
which got us to the moon and beyond.

The New Deal had a price tag of
only $500 billion. The Marshall Plan that enabled
the reconstruction of Europe following WWII for $13 billion, comes
out to approximately $125 billion in 2008 dollars. The cost of
fixing the S&L crisis was $235 billion.

CNBC confirms
that the New Deal cost about $500 billion (and the S&L
crisis cost around $256
billion) in inflation adjusted dollars. So even though
the government’s spending on the “war” on the economic crisis
dwarfs the amount spent on the New
Deal, our economy is still stuck in the mud. Given that the
government has done so much, but we are still mired in a situation
which in many ways is comparable to the Great Depression, it is not
a very radical statement to say that the government is doing the
wrong things to address the downturn. I hope
that the economy recovers. But the above comparisons are worrisome,
indeed. Note: Happy
talk cannot fix the economy. If it could, I would write
with a more optimistic spin. http://feedproxy.google.com/~r/zerohedge/feed/~3/peUNOlV2KOE/underneath-happy-talk-bad-great-depression
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