Simon Johnson: Worse Than the Great Depression


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” it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.” — Simon Johnson

I’m not ordinarily given to predicting market moves. I varied from that in 2007 when I predicted the market lows would go to between 5,000-6,000 in the Dow Jones average. I was ridiculed but still right. Now I am saying that I can’t see a higher  “bottom” than between 7,000-8,000.” — Neil Garfield

SEE ALSO stocks-resume-downward-spiral-as-experts-ignore-housing-crisis

A Second Great Depression, or Worse?


Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?

Today’s Economist

Perspectives from expert contributors.

The easy answer is “no” — the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.

The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.

First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau’s most recent online data, G.D.P. peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a decline of about 4 percent.

Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).

Even by the highest estimates — which include people discouraged from looking for a job, thus not registered as unemployed — the jobless rate reached around 16 to 17 percent. It’s a jobs disaster, to be sure, but not the same scale as the Great Depression.

Third, in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled manner — largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a calming role. (I’m on the F.D.I.C.’s newly created systemic resolution advisory committee, but I don’t have anything to do with how the agency handles small and medium-size banks.)

But the experience at the end of the 19th century was also quite different from the 1930s — not as horrendous, yet very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but rather agriculture — a different play on real estate.

There were booming new technologies in that day, including the stories we know well about the rapid development of transportation, telephones, electricity and steel. But falling agricultural prices kept getting in the way for many Americans. With large debt burdens, farmers were vulnerable to deflation (a lower price level in general or just for their products). And before the big migration into cities, farmers were a mainstay of consumption.

According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record, according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than five years of economic decline.

In this context, it is quite striking — and deeply alarming — to hear a prominent Republican presidential candidate attack Ben Bernanke, the Federal Reserve chairman, for his efforts to prevent deflation. Specifically, Gov. Rick Perry of Texas said earlier this week, referring to Mr. Bernanke: “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — er, treasonous, in my opinion.”

In the 19th century the agricultural sector, particularly in the West, favored higher prices and effectively looser monetary policy. This was the background for William Jennings Bryan’s famous “Cross of Gold” speech in 1896; the “gold” to which he referred was the gold standard, the bastion of hard money — and tendency toward deflation — favored by the East Coast financial establishment.

Populism in the 19th century was, broadly speaking, from the left. But now the rising populists are from the right of the political spectrum, and they seem intent on intimidating monetary policy makers into inaction. We see this push both on the campaign trail and on Capitol Hill — for example, in interactions between the House Financial Services Committee, where Representative Ron Paul of Texas is chairman of the monetary policy subcommittee, and the Federal Reserve.

The relative decline of agriculture and the rise of industry and services over a century ago were long believed to have made the economy more stable, as it moved away from cycles based on the weather and global swings in supply and demand for commodities. But financial development creates its own vulnerability as more people have access to credit for their personal and business decisions. Add to that the rise of a financial sector that has proved brilliant at extracting subsidies that protect against downside risk, and hence encourage excessive risk-taking. The result is an economy that is at least as prone to big boom-bust cycles as what existed at the end of the 19th century.

The rise of the Tea Party has taken fiscal policy off the table as a potential countercyclical instrument; the next fiscal moves will be contractionary (probably more spending cuts), whether jobs start to come back or not. In this situation, monetary policy matters a great deal, and Mr. Bernanke’s focus on avoiding deflation and hence limiting the problems for debtors does not seem inappropriate (for more on Mr. Bernanke, his motivations and actions, see David Wessel’s book, “In Fed We Trust“).

Mr. Bernanke has his flaws, to be sure. Under his leadership, the Fed has been reluctant to take on regulatory issues, continuing to see the incentive distortions of “too big to fail” banks as somehow separate from monetary policy, its primary concern. And his team has consistently pushed for capital requirements that are too low relative to the shocks we now face.

And the Federal Reserve itself is to blame for some of the damage to its reputation, although it did get a major assist from Treasury in 2008-9. There were too many bailouts rushed over weekends, with terms that were too generous to incumbent management and not sufficiently advantageous to the public purse.

But to accuse Mr. Bernanke of treason for worrying about deflation is worse than dangerous politics. It risks returning us to the long slump of the late 1870s.

16 Responses

  1. 5000 or 8000 points on the Dow?

    In my view the article attempts to squeeze hard to create distance from the depression era.

    real unemployment at 16-17%
    question: in 1935 what was the average retirement age or put differently how many early retiremees do we have who are not counted because they cannot bring themselves to admit they are unemployed versus taking a sabatical? while they consume their IRAs —hoping to die before the money runs out?

    real GDP down 20% in the depression but only 2-3% now?

    Look at the price of gold and remeasure the REAL decline in GDP—looks like 20% to me??? After all we do measure GDP in $$$$ do we not? How does it stack up in swiss franks? again 25%

    ok but this time weve got a really stable europe unlike last time?
    oh but this post is a few days old so I can now look back and point out that the germans are on the rise and would not cross the road for a greek , italian, or frog except to spit——-and a couple little notes—the germans are undoubtedly strengthening their border security and have reinitiated a military buildup—they appear to have more tanks on the production line today than during WWII—–under contract of sale to middle eastern potentates—–best tanks ever built—and tell me they are not looking at the old passes that they took and held several times since frederick the great–whether in austria, checkland or poland ——-but thats ok because the Federal reserve is already printing money and transfering it to the ECB to cover the rolling off paper of half europe–no issue there for the tea party either

    no problem there at all

    and lets pick a couple items to distinguish the depression from today–in 1930 the us was the largest producer of all minerals including oil–iron ore, etc——-all gone now–almost

    and we had a trained workforce that could pretty much all speak english–albeit with an accent—-trained europeans—ironsmiths, tool and dye makers etc–now the best and brightest have nervous breakdowns if their ipads stick—–

    we had real factories–made real things–not software —apple higher cap than xom? no bubble there.

    and of course to distinguish 2008 from today——-europe was not exactly coming apart at the seams——japan hadny been smashed by ?

    and china had not pumped a huge debt bubble there–unsustainable–they pulled the world up to 11000 dow by internal borrowing to build a thousand bridges to nowhere–now they stop and call in their markers–fed prints to meet these unfunded non-rollovers–like greece wishes it could

    so even if the two party monopoly tries to do something between now and 11/12 what can they do that is credible? like greece they lack credibility–the only thing they have going for them is the ability of the federal reserve to print–and the amercian people’s willingness to accept the gross misstatement above that there has been no inflation and no severe decline in gdp

    im afraid 8000 only if fed starts pumping money directly into equity markets——more anyway–the markets looked like they were backstopped ditectly the last 2 years–will there be another tarp–another qe3-4-5—when will they start printing $1000 bills? before or after the run starts?

    midwest banks will barely honor east coast banks today–a whisker away from freeze up–now

    huge public works programs too late–too late to hold above 7000—even then its propped and pumped–not a free market—-that ended in 2008–

    and a couple other items that are worse than

  2. “Florida will be a bright spot … people are broke and the dollar is cheap … that means more foreign tourists and US families will drive to FL rather than go overseas ,, Florida tourism numbers are improving … Also you might not have noticed but due to fiscal discipline in Talahassee Florida’s credit rating was bumped from AA+ to AAA last week… The jobs will remain “florida style” however … service jobs that don’t pay.”

    Sounds nice in theory, but where are all these millions of people going to come from and with what money? There aren’t enough of the top 1% class to do it for Florida. ….coming from Europe? The Euro is on the verge of going belly up and if it doesn’t all of Europe will be saddled with a century of debt. So, just the top 1% class from Europe too? Why come here, they will own the best vacation spots in the world.

    Latin America? Don’t think so…
    China? Well there’s enough of them and their consumption and travel is up. But, I don’t think most service workers in Florida can respond to the simplest ‘ni how ma?’ Plus, Chinese tourists will have plenty of choices between China and here….

  3. The attorney general lets the banksters get away with economic genocide. Lets the banksters commit fraud and illegal foreclosures. Then puts the attorneys representing the home owners in jail because they cant defend or negotiate in a court of law that allows the banksters to commit fraud.

    This reminds me of the beginning of the Third Reich. Or maybe a version of Alice in Wonderland.


  4. The Attorney General covers the banksters backs that dont give loan mods and then puts the little attorneys in jail.

  5. ORANGE County California – Land of Frauds

    California State Attorney General
    APNewsBreak: Lawyers accused of scam in bank suits
    Published August 18, 2011
    Associated Press

    COSTA MESA, Calif. – California prosecutors sued several lawyers and call center operators for allegedly duping desperate homeowners across the country into paying thousands of dollars to join dubious lawsuits against big banks.

    The complaint unsealed Thursday in Los Angeles County Superior Court accuses prominent foreclosure attorneys Philip Kramer and Mitchell Stein and at least 17 other individuals and businesses of ensnaring borrowers in a scheme that falsely promised a cut of future settlements.

    The lawsuit portrays the defendants as the most recent in the chain of mortgage-related scammers who helped fuel the housing bubble and have cashed in on its collapse. The defendants previously worked in the fraud-ridden loan modification industry, in which lawyers offer to negotiate better mortgage terms on behalf of troubled borrowers in exchange for a fee.

    They are accused of telling borrowers that they had a solid claim to being victims of predatory lending because courts had already found most lenders to have approved inappropriate mortgages.

    “They essentially took advantage of what we know is a growing sentiment out there,” California Attorney General Kamala Harris said Thursday. “They suggested that by joining this lawsuit, the banks would have to pay. But the only people who paid were those homeowners who were victimized for the second time.”

    Investigators are aware of some 2,500 California residents who have been listed as defendants in the lawsuits, but there could be many more who paid fees and were never actually added to the suits or are out of the state, Harris said.

    Up to 2 million official-looking mailers advertising the lawsuits were sent to homes in at least 16 other states, including Arizona, Florida, Nevada, New York and New Jersey, Harris’ office said in a release.

    Some borrowers had their homes foreclosed on after paying to join the suits filed by Kramer and Stein, according to the complaint.

    Defendants in the complaint are all based in California, but the investigation could eventually ensnare associates in other parts of the country.

    Florida bar spokeswoman Zannah Lyle confirmed that her organization was looking into allegations of rule violations concerning Tallahassee-based lawyer and lobbyist David Ramba’s work with Kramer to recruit struggling homeowners to join lawsuits against banks. Ramba did not immediately respond to a message seeking comment.

    The attorney general’s complaint was unsealed a day after state bar investigators and state Department of Justice agents served defendants with copies of the complaint at 14 locations in Los Angeles and Orange counties.

    Officials loaded boxes of seized documents into moving vans Wednesday. Armed police guarded the entrances to emptied offices, which appeared to contain wall-to-wall cubicles for phone center workers. The Orange County raids took place in sprawling office parks with manicured lawns surrounding Irvine’s airport.

    Outside one office, a man in a business suit said he had worked for the raided company but refused to answer any other questions as he carried a stack of framed pictures from the building and oversaw the removal of a small refrigerator by younger apparent employees.

    At another office, a manager who would only give his first name, David, said he and his colleagues had been questioned about their connection with Kramer. He said they had done business with the lawyer two years ago but not since.

    Prosecutors accuse the defendants of making false representations and three counts of unfair competition. They are seeking an injunction stopping the defendants from continuing with the business in addition to unspecified monetary damages.

    No criminal charges have been filed in connection with the case.

    Kramer’s firm and the other defendants’ were placed into receivership on Monday and have had their assets seized, the attorney general’s office said.

    Harris said that bar association lawyers were reviewing the suits against the banks to determine whether any plaintiffs had legitimate complaints that could be pursued against the lenders.

    Calls to Kramer’s office were being forwarded to a state bar phone number Thursday. Calls to Stein, who refers to himself on his firm’s website and other communications as “The Doberman,” went straight to a busy signal.

    Prosecutors accuse Kramer and Stein of exploiting an existing lawsuit known as Ronald v. Bank of America NA filed in Los Angeles Superior Court in March 2009. Stein was one of the lawyers who first filed that case, which alleged on behalf of a few dozen clients that the bank committed mortgage-related improprieties. Kramer later joined as counsel to another defendant who was added to the case.

    The lawyers used the Ronald case to drum up business and have since filed separate lawsuits against JPMorgan Chase & Co, Wells Fargo Bank NA, Citibank NA and others to broaden their base of clients, the complaint alleges.

    The lawyers and their associates sent mailers that looked like official class-action lawsuit notifications and stated that their recipients were potential plaintiffs in a litigation settlement. The letters claimed they could cut their mortgage to as little as 70 percent of their value, prevent foreclosure and get $75,000 in damages.

    They directed people to phone supposed law offices that were actually call centers staffed by operators with no legal expertise.

    In addition to using mailers, Stein used his law firm’s Facebook page to make overblown claims about bank behavior and his ability to seek retribution, according to the complaint.

    “Look for Patriot Act violations in your mortgage,” Stein wrote in a Jan. 17 posting. “Talk to a lawyer. You might just cancel the mortgage.”

    Prosecutors estimated hundreds or even thousands of people paid between $5,000 and $10,000 to join the lawyers’ suits.

    Kramer gloated in an October 2010 e-mail to another defendant about the virtues of their new undertaking compared with the loan modification business.

    “Only morons would prefer to ‘sell’ mods from this day forward,” Kramer wrote, according the complaint.

    Bank records show more than $7 million deposited in three of Kramer’s accounts connected to the investigation, with millions more paid to call centers that provided answers to prospective clients responding to the mailers, the complaint said.

    Those workers are accused in the complaint of overstating lawyers’ progress in the lawsuits, all of which are in their earliest stages, and of misrepresenting judges’ apparent disposition toward the banks.

    Some salespeople are alleged to have told borrowers that the judge in the Ronald v. Bank of America has told the lender it has “no defense” and that its main argument is “absurd.”

    The salespeople also tell homeowners that the case’s lawyers have proven banks have taken money from investors that can’t be accounted for, the complaint says.

    Philip Warmanen, a 71-year-old travel agent in Jacksonville, Fla., was among those who joined the lawsuit. Warmanen said he responded to a mailer that turned out to be from Kramer’s law firm early this year after Bank of America failed to offer him a modification on his home that had lost about half its value since he paid $525,000 for it in 2006.

    Warmanen was told he should receive a modification and other settlement benefits in just a couple months when he paid $4,000 to join the lawsuit but has heard little of the case since then.

    “They said there was a strong likelihood that this would be successful and that they had a few cases where the judgment had come through positively in favor of the complainants,” he said. “They led me to believe that that might be my case.”

    Jacob Adelman can be reached at

  6. Everything will continue to go down, down, down…until the WHOLE TRUTH is out there re. the “mortgages”…ie. not normal “funded” mortgages—but COLLECTION RIGHTS TRANSFERRED BY ASSIGNMENT—NOT A “NOTE”. NO NOTES validly sold to trusts…BECAUSE THERE WAS NO NOTE TO TRANSFER…this is why evidence is/was being destroyed…the criminal pigs are scrambling…the jig is up…the emperor has no clothes…

    How long can they pretend???

  7. >Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).<

    I'm curious about this statement….Is the writer using the same definition of unemployment as was used in the 1930"s? Using the 1930's definition, is our current unemployment rate at or close to the "20 percent level" mentioned by the writer?

    If today's numbers are "recast" using the same definition of unemployment used in the 1930's, will the import of the article's points and conclusion change? I would think so. What is your opinion?

  8. From San Jose State:

    The Depression of 1873-1879 was precipitated by the bankruptcy of the railroad investment firm of Jay Cooke and Co. but the deeper cause was the restrictive monetary policy of the Federal Government. The U.S. was on the Gold Standard but the increments in gold holdings was not sufficient to keep up with the demand for money resulting from the growth of the economy. Consequently there was deflation. This meant that even if the nominal interest rate were zero the real interest rate would be positive.

  9. BTSL ,

    Florida will be a bright spot … people are broke and the dollar is cheap … that means more foreign tourists and US families will drive to FL rather than go overseas ,, Florida tourism numbers are improving … Also you might not have noticed but due to fiscal discipline in Talahassee Florida’s credit rating was bumped from AA+ to AAA last week… The jobs will remain “florida style” however … service jobs that don’t pay.

    Do not believe the numbers, anymore than you believe the cost of living inflation index, that have kept social security payments the same for three years.

    “Statistics are in the main, used by rascals to impress fools”

  11. Somebody or Some group at our expense is (are) doing everything they can to ruin the economy so that Barak Obama does not get re-elected.

    I am speaking as an American Citizen not as a Republican or Democrat or Independent.

  12. Somebody or Some group at our expense is (are) doing everything to ruin the economy so that Barak Obama does not get re-elected.

    I am speaking as an American Citizen not as a Republican or Democrat or Independent.

  13. when I had problems I called my state senators office at the local office and explained my problems and was prepared to rip them a new ahole, but the local assistant placed a call to Tallahassee and my account was cleared in 24 hours. Suggest you try the same….

  14. First of all the 10% unemployment`is real about 25%. first of all in florida most people can not collect and you apply then the system kicks you out so you call to find out whY? oh you have a adjuticator. so you call the ajudicator and you tell why you lost your job. HE SAYS
    HE WILL GET BACK to you he doesnt. mean while you can tclaim weeks. you wait for something in the mail, still not able to claim weeks. . then you call up and tell the next clerk and she tell you r your case was closed ????? you have to reopen it. had to wait 2 weeks to claim weeks. so all this time the weeks could not be claimed is my husband part of the unemployed or the employed since the system kicked him out??? and NO One would help. amazing i guess until they lose their job. so i think there numbers are all wrong to pretend we are not in a deprression to make the administration look good. for god sake look around your neighborhoods. homes empty., foods stamp applications have gone up

  15. […] Read More: Simon Johnson: Worse Than the Great Depression […]

  16. Before the current crisis of the last few days /weeks and the unraveling of Europe, Florida was already screwed for the rest of the decade. Florida Legislature economists have long since stated that they did not foresee a return to pre recession levels of employment until 2020.
    Now we have double dip or worse….

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