Is the Current Crisis Really as Bad as the Great Depression?

Nobel-prize winner and former chief economist of the World Bank, Joseph Stiglitz has warned that the current financial crisis will continue for at least another eighteen months and in many ways represents a worse situation than the one faced by Americans during the Great Depression of the 1930s.

This is clearly the most serious problem since the Great Depression and in some ways worse in terms of the financial institutions.” Stiglitz commented, referring to the fact that lenders are unwilling to take risks to finance each other because they no longer have complete access to their own undertakings let alone those of other institutions.

The chart above shows average annual bank failures by decade back to the 1930s, illustrating a few points:

1. Put in context, the S&L crisis of the 1980s and early 1990s was relatively mild compared to the banking crisis of the 1930s, in terms of average bank failures per year.
2. The banking crisis of the 1930s was so severe that more banks failed (4,000) in a single year (1933) than the sum total of all bank failures in the period since 1934 (3,566).
3. Most of the bank failures in the 1930s were in 1930-1933 period, when bank failures averaged almost 2,300 annually. Once FDIC was put in place, the average number of bank failures dropped to about 50 per year.
4. Unless it gets a lot, lot worse, any comparison of today's financial crisis to the 1930s seems like quite an exaggeration.

Comments

[Pretzel Logic:]

I think the size of the banks in question should factor into the equation somehow. In the 30's, I have to believe the large numbers were mainly "ma and pa" local banks, so hundreds could fail and still only be equal to one WaMu or one Lehman. Total market cap or total assets of all failing banks from each period, adjusted for inflation, would probably be a much more telling number.

2008 Sep 18 06:12 AM

[damienhaas:]

The number of banks collapsing will be more than current stated number. Then we see that it is depression.

2008 Sep 18 07:00 AM

[jimitee:]

The difference is our debt is held mostly outside the USA. The banks will fail because of lack of demand as the economy stagnates. The average person is one heartbeat away from losing everything. It is a worse scenario than the depression. That community organizing skill that Obama has will come in handy when we all end up on line for soup and bread.

2008 Sep 18 08:24 AM

[Paul Killinger:]

The truth is NO ONE is losing the money they have socked away in the bank, money sector or otherwise. It's the investment banks and hedge funds which are taking it on the chin, who are the same folks that got us into this predicament in the first place.

FEAR is always the best predictor of market bottoms, and the GREATER the fear the more likely the bottom. Juding by the posts and comments I'm seeing on SA, the bottom is fast approaching.

2008 Sep 18 11:16 AM

[GaryD:]

Six days ago this idiot's post was titled "We're Still a Long Way From a Real Banking Crisis":

seekingalpha.com/artic...

Six days later (Six Freaking Days!) he says that we are in a banking crisis. What a complete and utter moron.

I am hereby proposing a "Mark Perry Contra Fund". The fund will take whatever dumbass statement Perry has made in the past week and bet on the opposite coming true.

For example, when he called a bottom in the housing market a couple months ago, you could have made a killing betting against him. If you bet against the dollar after his insane comments that the dollar was going to roar back you would have made a killing. The list goes on.

Of course, his bum chum buddies have banned short selling so it'll be tough to execute on this strategy, but where there's a will there's a way! Or is it "where there's a public toilet there's a neocon?" I can't remember...

2008 Sep 19 10:42 PM