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The following experts have – at some point during the last 2 years – said that the economic crisis could be worse than the Great Depression:

How could that possibly be, when the stock market has largely recovered? (Let’s forget for a moment that the stock market rallied after 1929, but then crashed in a double dip).

To find out, we’ll look at a couple of comparisons to get an idea of what is going on in the rest of the economy. And then we’ll compare the government’s efforts in the 1930s to today.

Housing Crisis Rivals Great Depression

As I noted last month, the current real estate slump rivals the Great Depression:

Meredith Whitney, Nouriel Roubini (and here), Zillow, Case-Shiller and even S&P have been calling a double dip in housing.

States and Cities In Worst Shape Since the Great Depression

States and cities are in dire financial straits, and many may default in 2011.

California is issuing IOUs for only the second time since the Great Depression.

Things haven’t been this bad for state and local governments since the 30s.

Loan Loss Rate Higher than During the Great Depression

In October 2009, I reported:

In May, analyst Mike Mayo predicted that the bank loan loss rate would be higher than during the Great Depression. In a new report, Moody’s has just confirmed (as summarized by Zero Hedge): The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934. And see this. Here’s a chart summarizing the findings: (click here for full chart).

Indeed, top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out that while banks faced a liquidity crisis during the Great Depression, today they are wholly insolvent. See this, this, this and this. Insolvency is much more severe than a shortage of liquidity.

Unemployment at or Near Depression Levels

USA Today reports today:

So many Americans have been jobless for so long that the government is changing how it records long-term unemployment. Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless. *** The change is a sign that bureau officials “are afraid that a cap of two years may be ‘understating the true average duration’ — but they won’t know by how much until they raise the upper limit,” says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations. *** “The BLS doesn’t make such changes lightly,” Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years. *** Although “this feels like something we’ve not experienced” since the Great Depression, she says, economists need more information to be sure.

The following chart from Calculated Risk shows that this is not a normal spike in unemployment:



As does this chart from Clusterstock:

As I noted in October:

And see this, this, and this.



Food Stamps Replace Soup Kitchens

1 out of every 7 Americans now rely on food stamps.

While we don’t see soup kitchens, it may only be because so many Americans are receiving food stamps.

Indeed, despite the dramatic photographs we’ve all seen of the 1930s, the 43 million Americans relying on food stamps to get by may actually be much greater than the number who relied on soup kitchens during the Great Depression.

Inequality Worse than During the Great Depression

I recently reported that inequality is worse than it’s been since 1917:

Most mainstream economists do not believe there is a causal connection between inequality and severe downturns.But recent studies by Emmanuel Saez and Thomas Piketty are waking up more and more economists to the possibility that there may be a connection. Specifically, economics professors Saez (UC Berkeley) and Piketty (Paris School of Economics) show that the percentage of wealth held by the richest 1% of Americans peaked in 1928 and 2007 – right before each crash: As the Washington Post’s Ezra Klein wrote in June: *** Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously… Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes …. Reuters wrote an excellent piece on the issue of inequality and crashes (discussing the first three factors) last month: Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may not directly cause crises, but it can be a contributing factor. *** Inequality is actually worse now than it’s been since 1917.

The War Isn’t Working

Given the above facts, it would seem that the government hasn’t been doing much. But the scary thing is that the government has done more than during the Great Depression, but the economy is still stuck a pit.

Specifically, many economists credit World War II with getting us out of the Depression. (I disagree, but that’s another story).

This time, we’ve been at war in both Iraq and Afghanistan far longer than we were in World War II. But our economy is still stuck in a rut.

Moreover, the amount spent in emergency bailouts, loans and subsidies during this financial crisis arguably dwarfs the amount which the government spent during the New Deal.

For example, Casey Research wrote in 2008:

Paulson and Bernanke have embarked on the largest bailout program ever conceived …. a program which so far will cost taxpayers $8.5 trillion. [The updated, exact number can be disputed. But as shown below, the exact number of trillions of dollars is not that important.] So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception? To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past: As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution. Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars. The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months! In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks. The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion. In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond. The New Deal had a price tag of only $500 billion. The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars. The cost of fixing the S&L crisis was $235 billion.

CNBC confirms that the New Deal cost about $500 billion (and the S&L crisis cost around $256 billion) in inflation adjusted dollars.

So even though the government’s spending on the “war” on the economic crisis dwarfs the amount spent on the New Deal, our economy is still stuck in the mud.

Given that the government has done so much, but we are still mired in a situation which in many ways is comparable to the Great Depression, it is not a very radical statement to say that the government is doing the wrong things to address the downturn.

I hope that the economy recovers. But the above comparisons are worrisome, indeed.

Note: Happy talk cannot fix the economy. If it could, I would write with a more optimistic spin.