A depression: Could a third of Americans be right?

By

The ongoing credit crisis raised fresh worries about an old problem – a 1930s kind of problem.

Yes, the D-word.

Most forecasters say an economic depression remains a highly unlikely scenario.
But many also say that the risk is real – because of the possible collapse of credit markets.

Recommended: Five signs Americans are forgetting recession's lessons

At the very least, it seems as if fear and the search for historical reference points are causing a refresher course in lessons from nearly 80 years ago.

Consider this: The words “depression” and “economy” coincided in 1,235 articles in major US newspapers last month, according to the Nexis database service. That compares with 228 times in September 2007. In a new USA Today/Gallup poll, one-third of Americans defined the current state of the economy as a depression, not a recession.

The economic news certainly isn’t buoying anyone's spirits. Major automakers reported Wednesday double-digit declines in car sales for last month. The same day, the Institute for Supply Management reported a large drop in new orders for September, suggesting a continuing slowdown in manufacturing.

Still, concern about the direst outcomes is still hypothetical, not reality. On Friday, the Labor Department will release unemployment figures that are expected to show the continued erosion of jobs. But at 6 percent, unemployment is far below the devastating 25 percent rate seen in the Great Depression’s low point.

On its website, the National Bureau of Economic Research refers to depression as “a recession that is major in both scale and duration.” So what’s a recession? “A period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”

The big risk right now, economists say, is that a credit crunch causes major shifts in behavior – where employers can’t get loans needed to create new jobs, consumers can’t get loans for major purchases, and soon lots of people are losing jobs as everyone hunkers down. Asset prices for things like homes could keep falling, if few are able or willing to be buyers.

That risk is offset by a reason for optimism: Nobody wants to repeat the 1930s, and policymakers have learned some lessons from that era.

In his life before becoming Federal Reserve chairman, Ben Bernanke’s academic research focused heavily on the Great Depression. In one important paper, he argued that a breakdown in the credit system “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.”

To the degree that that risk is present today, the process of purging bad debts and reviving channels of credit is vital to the economy. That's why there's all the talk about a rescue package in Washington – not for bankers personally but for the system.

Another lesson of the Depression is this: Policymakers responding to a crisis can sometimes create new problems if they send mixed signals – engendering confusion or hesitation among the marketplace participants on whom the economy ultimately depends.

These are just a couple of lessons from the past – ones worth remembering in the heat of fast-paced current news.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...