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

Sep.18.08 | About: Financial Select (XLF)

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.