The current recession could be over in 2010 or 2011, depending on who one talks to. But either way, we will not even come close to the Great Depression, and so much of the fear and panic selling accompanying this recession is both unwarranted and unnecessary. Some of it is real, reflecting the loss of jobs and assets, but much of it is an overreaction to the irrational exuberance of investors and home buyers who borrowed too much during a time of easy money.

The similarities are striking. A great inequality of wealth caused the majority of consumers to borrow excessively to maintain their standard of living in the 1930s, just as today 90 percent of households saw a decline in real household incomes since 2000 and so borrowed against their homes or credit cards.

But today’s worst case scenarios do not compare to the Great Depression. Then, unemployment soared to more than 25 percent, while incomes shrank a collective 50 percent. There was little regulation of banks and so 9,000 failed, while today it may not be more than 100 before the dust settles. Today, unemployment for full time workers may reach 9 percent before this is over-13 percent if we include part-timers-while incomes may decline all of 5 percent. Although it could be worse if actual deflation sets in.

Deflation is not yet in the cards, however, as the price indexes are still positive. The latest fourth quarter GDP growth estimate showed overall prices were up 3.2 percent in 2008, vs. 2.8 percent in 2007. The Consumer Price Index fell in the last months, but ended up unchanged for the year.

Nor was there a social safety net then. Roosevelt even suggested that the cities had become too crowded and those that could should return to their farms! Today we have social security, senior health care and bank deposit guarantees. In fact, the incomes of seniors 65 years or older have risen faster than of non-senior households since 2000.

The one area that most resembles the 1930s has been the crash in home prices, which may decline 50 percent in some regions. That issue is still unresolved today, whereas the federal government simply bought and held foreclosed homes until borrowers could afford to own them again in the 1930s.

Today, the just proposed Homeowner Affordability and Stability Plan is attempting to keep people in their homes, either by buying down their monthly payments or the mortgage principal. Another part of the Treasury plan is to boost jumbo conforming loans back to the higher 2008 limits, by adding $200 billion in equity to Fannie Mae and Freddie Mac.

The main culprit today and the 1930s, though, was a growing inequality of incomes. Martin Eccles, Roosevelt’s Federal Reserve Chairman of that time, describes what happened during the Depression.

. . . a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

So the Obama Administration’s ‘other’ stimulus plan, the just passed American Recovery and Reinvestment Plan (ARRP), is designed to attack both income inequality by stimulating the creation of new jobs, which lessens the need to borrow money, and buying up toxic mortgages in order to strengthen the banking system. This is learning from past history, which should mean that we are not doomed to repeat it.

Harlan Green © 2009