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COVID-19 crisis is not the Great Depression Thumbnail

COVID-19 crisis is not the Great Depression

Recently I’m seeing articles comparing the 2020 drop in GDP, or the spike in unemployment to the Great Depression.  This is not the Great Depression and here’s why.

Back in college, studying economics I was stunned to learn how little the United States President actually impacts the economy.  We spent a whole semester on Secrets of the Temple: How the Federal Reserve Runs the Country, by William Greider[1].  In a nutshell, the Fed controls our outcome during this Coronavirus unprecedented time.  And they aren’t sending us into another depression.

In 2002, Ben Bernanke, then a member of the Federal Reserve Board of Governors, acknowledged publicly… The Federal Reserve’s mistakes contributed to the “worst economic disaster in American history” (Bernanke 2002, regarding the Great Depression, article by Gary Richardson, Federal Reserve Bank of Richmond).[2]

1  At the start of the Depression, Federal Reserve’s decision-making structure was decentralized and often ineffective.

Now they act and react, and they don’t need approval from Congress, or permission from the President.  In some respects, the fact they we don’t elect these bankers, allows them to do what they see best without political influence.     

2  During that time, if a local bank needed money, another regional bank told              them no.

Let’s say in Fort Collins, Colorado, the whole town got spooked and all went to the bank to withdrawal our money to cash. Our banks would have trucks delivering more cash.  During the Great Depression, other regional banks would simply say, No!

 3  Panic spread from town to town. Within a few weeks, hundreds of banks                   suspended operations. The downturn hit bottom in March 1933, when the               commercial banking system collapsed and President Roosevelt declared a           national banking “holiday”.

During COVID, it is the state's governors that declare stay at home orders. Unless President Trump called not going to the bank to access your account a “holiday”, then things aren’t 1933.

4  FDIC wasn’t in place till 1933[3] 

During Covid-19, you have to admit, having your money insured at the bank feels better than the folks that lived in the Great Depression.

5  Fed’s decision to raise interest rates in 1928 and 1929

During that time, This was one the Federal Reserve’s biggest mistakes going into the Great Depression, they tightened money supply.  In 2020, the Fed has lowered interest rates to nearly zero, and injected Trillions into the money supply.

6  Banks could call your mortgage.  Lending laws have changed from then

Back then the bank could “call” your mortgage, demanding payment in full, and if you couldn’t pay it, you were homeless. Present times, there is a forbearance clause allowing mortgage deferment.  We aren’t throwing people on the streets due to Coronavirus. 

7  During that time, two-and-a-half million unemployed people left the                        Midwestern Dust Bowl states, and they didn’t have cars with DVD players for        the kids in the backseat. 

COVID-19 stay at home orders aren’t the best, especially for our extroverted friends and spouses (I’m an introvert so it’s kinda nice, not going to lie). But at least this recession doesn’t have the Dust Bowl in the 1930’s blowing away all our dirt and food supply.

8  We didn’t have unemployment insurance

Back then, if the bank took your home, it often meant they took your livelihood.  Your crop, livestock, or business was on your homestead. Today there are places hiring the unemployed.  And those not working, at least have unemployment insurance. 

At its lowest point during the Great Depression, industrial production in the United States had declined 47 percent, real gross domestic product (GDP) had fallen 30 percent and total unemployment reached as high as 20 percent.

The Federal Reserve could have prevented deflation by preventing the collapse of the banking system or by counteracting the collapse with an expansion of the monetary base, but it failed to do so.  (Today) The Fed’s combination of a well-designed central bank and an effective conceptual framework enabled Bernanke to state confidently that, 

“Regarding the Great Depression, … we did it. We’re very sorry. … We won’t do it again.” Ben Bernanke, November 8, 2002, in a speech given at a conference to honor Milton Friedman … on the occasion of his 90th birthday.” [2] 

Hang in there.  We will figure this out.  Yesterday I pulled off the road on a mountain pass to a food truck of Mary Mountain Cookies.  They had a ‘cookie slide’, where the attendant in the food truck slid down your orders of cookies, six feet apart from his customers. Intrigued, I waited in anticipation for seeing what would happen when the patron had to pay the bill.  The attendant slid an alligator clip down on a string for the client's debit card, pulled it back up and ran it.  As an added compliment, he rubbed the card with a bleach wipe before sliding it back down.  I put a $20 in the tip jar and thanked him for the American ingenuity (and the cookies). 

Nathan Wilson

[1] https://www.amazon.com/Secrets-Temple-Federal-Reserve-Country/dp/0671675567

[2] https://www.federalreservehistory.org/essays/great_depression?mod=article_inline

[3] https://www.history.com/topics/great-depression/history-of-the-fdic