Thursday, October 02, 2008

Lessons from the Great Depression

From The New York Times:
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy. ...

At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed. ...

“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak. ...

The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further. ...

In the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.

“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”


  1. Recently an insurance company nearly wind up....

    A bank is nearly bankrupt......

    How it affect you? Did you buy insurance? Did you buy mini note or bonds?

    They say without using tax payer money, they will not be able to lend to small companies…..

    Bank primary role is to lend money….else what sort of business will let them earn….? Many ways of raising their own funds eg preference shares, sovereignty fund etc.

    The bankrupt company have chapter 11, the fail finance industry got bail out…… but your credit card will never get bail out…….other industries did not got bail out and merger etc and job laid

    Who fault?

    The top management of the Public listed company ( belong to "public" ) salary should be tied a portion of it to the shares price ( IPO or ave 5 years ).... so when the shares price drop, it don't just penalise the investors, but those who don't take care of the company.....If this rule is pass on, without any need of further regulation, all industries ( as long as it is public listed ) will be self regulated......

    Sign a petition to your favourite president candidate, congress member again and ask for their views to comment on this, and what regulations they are going to raise for implementation.....If you agree on my point, please share with many people as possible....

  2. How likely is it, though, that Main Street will freak out and make a run on banks this time. After all, FDIC insures most deposits in the country, and as far as I know, just about everybody still trusts the federal government to pay up if their bank fails. The FDIC wasn't formed until 1933, according to Wikipedia, which was after the run on banks that caused the Great Depression.

    Ironically, as a renter, I blame Main Street more than Wall Street. Ultimately, if consumers were smart enough to buy only as much house as they could afford, we wouldn't be in this mess--no matter how greedy and stupid Wall Street is.

  3. Correlation but not causation is the story here. The stock market crash was a SIGN of the times, not the cause of it. Notice how our stock market jumped up 500 points the day after it fell 700?

  4. sounds like the bailout will have "worked" if we don't fall into a Great Depression, just a normal market-cycle depression that just happens to last 5+ years and ends with the banks being forced to write everything down in order to receive another FedGov recap. sweet, i love futile efforts.

  5. Million - you arent far off the mark. This bill will not fix anything. All it will do (assuming it works) is cause a continued natural course downturn, versus an all out meltdown.

    In the coming months as things get worse (which they will), this bill will be met with howls of protest about how it did nothing. How shortsited. To be honest, after "the reserve" broke the buck, we had that massive electronic bank run, and the Ted spread exploded I really thought this was it - its over - this may be the end of the republic as we know it (im serious).

    Now that it looks like this bill will pass, and a modicum of confidence has been restored to the market, we may now continue with our regularly scheduled downturn. Just be glad thats all it is.

  6. This bail out must be stopped. Those who engaged in creating, trading, buying, selling and/or trading exotic financial instruments, derivatives, CMO’s, MBO’s, CDO’s and the like which are now and most likely have always been illiquid assets that have no or some unknown value and a high degree of risk must be held to the obligations of their own design. The “free market” operates knowing that those who make bad decisions, investments, take incoherent risks and ill conceived ventures will ultimately fail and fail they must!

    By allowing the same participants in the market to profit from all of this via the American Tax Payers dollars is unconscionable, further increasing the moral hazard in the market. Under the screen of stating that in the event they fail, “it will be more difficult for average Americans to obtain mortgages, car loans, consumer credit…” That’s misleading, in that yes in the short term less credit will be available to weak borrowers as the holders of the illiquid, toxic securities fail; however once they are gone, acquired, sold, liquidated and only the strong, surviving, financially secure, responsible, institutions and individuals are remaining there will still be a need for lenders and there will still be those who wish to borrow. Lenders will still want to make a profit and borrowers will still be willing to pay interest, thus this bail out is unnecessary and excessive, further it will benefit those who have done the greatest harm and perpetuate more dire consequences. The market will go down. There will be less available credit. Banks will fail. At the end of the day the pain from this will be short lived and then recover, verses a long drawn out recession by trying to perpetuate the status quo. Our economy will emerge stronger, safer, productive, and more secure if we allow those who created the situation we are in to fail.

    Stop the insanity; Stop the bail out!

  7. "Anon said...
    Our economy will emerge stronger, safer, productive, and more secure if we allow those who created the situation we are in to fail"

    If it were so contained, I would agree with you. The problem is commercial credit and the much larger segment of the economy being hit. Our firm is seeing an increaing number of calls from small businesses about frozen lines of credit. Often the business very solvent (but illiquid) and completely unrelated to housing. Their problems now are not just ordering inventory, but even worse, making payroll. If they miss payroll, the whole business goes down and several hundred jobs with it. Those several hundred jobs mean missed mortgage payments, less discretionary spending in the broader economy, etc. all which compound the problems even further.

    Muliply that by several small businesses, and youve got a major major MAJOR problem on your hands. This bill is intended to help the economy discern the weak from the strong (because right now credit is so tight it is killing both). Screw construction, screw finance & screw automotive - they are all weak and need to be made leaner. Not so with technology, medicine, specialty maufacturing, etc. which are doing just fine - yet they are dying alongside the weak. This indiscriminate killing cannot continue.

    Again, the issue is commercial credit is so frozen that the banks are denying credit both to good and bad credit risks. Yes this is a short term situation, but by that "short term" is over, if we have killed a number of good credit risks, the cycle is going to be much more drawn out than it otherwise would need to be. Thats why I support the bill. The risk of doing nothing is simply too large a risk to take.

  8. Interesting piece by Paul Krugman. Even a guy who hates this thing to the core sees the need for it (its a necessary evil).

    I found the comment of "destructive yahoos" particularly insightful with regard to the many no bailout comments on this board.

  9. Funny how not being able to obtain "easy credit" is blamed for causing the Great Depression; yet, it is the "easy credit" that is causing this financial catastrophe! Where is the credit crunch? Anyone with decent credit can still get a loan for less than 10%, and I still consider loans for less than 10% as being easy credit. Besides all of that, this bailout will just make it worse. It'll devalue the dollar and cause commodities to rise, making everything more expensive and destroying the middle-class in the process. The bailout will simply result in there being uber rich and the utterly poor.

  10. "Anon said...Where is the credit crunch?"

    Its out there, its just all in the commercial sector - not in the consumer sector. Exactly where it doesnt need to be (that is if you appreciate things like "jobs" and "growth")

  11. Anonymous said...
    Funny how not being able to obtain "easy credit" is blamed for causing the Great Depression; yet, it is the "easy credit" that is causing this financial catastrophe!

    Since "easy" is a relative term, I think different people are using it differently. When reliable, profitable companies can't get credit easily, it can become a problem. That's entirely different than giving credit to people who will never pay it back.

  12. There are some differences between now and the great depression. First, the commercial banks are loaded with real estate now. So any help with the commericial end involves the possible interference in the mortgage and real estate markets. These need to fall a lot farther to make a market. But the very commercial banks that we need to extend credit got way too involved in the real estate and Mortgage bond markets.