Showalter

Recent gyrations in the stock market have rattled nerves, and this had led people to make false comparisons with the crash of 1929.

The popular imagination believes the 1929 crash caused the Great Depression, but that is only part of the story. The underlying economy was already weak and ripe for a fall, and there were no regulatory mechanisms in place to cushion the fall.

The farm economy and rural areas of America had slipped into depression like conditions in the mid 1920s, and it was a harbinger of things to come.

As the rest of the world mobilized for World War I in 1914, young European men left their farms to fight, which drove up prices for American commodities.  After the war, Europe was still starving, further inflating prices for American farm products.

Thinking the good times would last forever, American farmers borrowed heavily to cultivate more land and buy more farm equipment.  When Europe finally recovered, commodity prices plunged and rural banks collapsed.  

American consumers in the cities were in the same boat, except they borrowed heavily to buy cars, homes, radios, and stocks. When their wealth evaporated in the stock market crash, over-leveraged banks failed, investment dried up, and business shed workers.

The world also got involved in a nasty trade war in 1930. Trying to protect domestic workers from cheap foreign goods, nations raised tariffs significantly.  

The tariffs backfired. Prices went up, trade slowed, and workers were laid off due to lack of consumer demand.  By 1933, unemployment was 25%.

Today, the banking system is in good shape, and Congress plans to pour over $1 trillion into the economy. The Federal Reserve Bank has lowered interest rates and injected several hundred billion dollars into the economy as well.

It is unlikely that these actions can prevent an economic recession, but they will mitigate and soften the blow of the slowdown.

Since the Great Depression, government has created numerous automatic stabilizers to prevent a full-scale collapse. These include the FDIC for bank deposits, unemployment insurance, food stamps, and Social Security.  

None of theses existed in 1929, and the Federal Reserve actually made things worse by raising interest rates in the aftermath of the crash.  They mistakenly tightened the supply of credit in an economy that desperately needed cheap money to stave off the crisis.

The Fed learned from 1929. In the 2009 recession, they moved quickly to boost liquidity, much like they are doing right now.

We will likely experience a demand driven recession, where economic activity dries up because people are not spending. Historically, these tend to be shorter, and economic activity should pick up next 

The 2009 recession was so hard because it was a debt-induced recession, much like the 1930s downturn.  It takes much longer to pull out of debt driven recessions because it takes time to unwind all the bad debts, foreclosures, defaulted loans, If our government can keep people above water with sick pay, small business loans, unemployment benefits, and stimulus checks, demand should come back when life gets back to normal.  

The real concern for Baytown is the price of oil and gas.  A prolonged slump in energy prices will have a ripple effect that will hit all too close to home.

 

Dr. Steve Showalter is a government professor at Lee College in Baytown.

 

 

 

 

 

 

 

 

 

 

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