Economic depression hurts a lot more than this
The world financial crisis has brought the usual talking heads out of their offices and into the spotlight. Prime among them locally is economist Gareth Morgan who has been heard in various quarters invoking the D-word. ‘Depression’ (as opposed to the less-threatening ‘recession’) is a real possibility in New Zealand, he said on Newstalk ZB last week, and the result of Main Street Americans punishing Wall Street greedies for their plush lifestyles. American correspondent Tim Wilson made a similar claim on One News. I am no economist, in fact I don’t even open my bank statements, but that kind of talk just seems a little too catastrophic and implausible to me.
For starters, ordinary folk have better things to worry about. Main Street Americans and Britons and Japanese aren’t trying to rid the Gordon Geckos of their trophy wives and ski lodges at Aspen—they are panicking about their own financial well-being and families' futures. To say that this latest turmoil is the result of some sort of grudge is to trivialise their very real fear.
Besides, this ain't no depression. Former Prime Minister and Director-General of the World Trade Organisation Mike Moore is talking sense in the Herald today. He points out that US Federal Reserve Bank president Ben Bernanke did his thesis on the Great Depression and is well versed in its lessons. MarketWatch chief economist Irwin Kellner is also doing his best to pour cold water on the depression talk. He points out significant differences between the 1930s and the noughties. The crash of 1929 saw a 40 percent drop in the Dow Jones in a two-month period, says Kellner. The current slide of 22 percent has happened over the past year. As for our financial institutions, about 20 banks have failed in the past two years. More than 9,000 banks failed in the 1930s.
The Wall St Journal's Jason Zweig points to the strength of the Federal Reserve today, compared to 1929 and makes this interesting point: Depressions start not when lots of people are worried about them, as we have today, but when no one is worried about them, as in 1929.
But it seems people (well, American people mostly) are misinterpreting shrill and simplistic news reports about financial chaos, a bear market, the credit crunch, and bailout proposals. A recent USA Today/Gallup poll found one third of Americans thought they were experiencing an economic depression.
Time for a reality check. US unemployment hit 25 percent in 1933; it is about 6 percent today, says Kellner. US GDP dropped by 25 percent in the years following the crash; it is up 3 percent in the past year. And about 4 percent of American home loans are kaput today, compared to 40 percent in 1934. You might want to argue that 2008 is 1929 and the worst is yet to come. But where's the evidence?
Back to New Zealand. My dad grew up during the Great Depression. He used to tell me stories about hungry people turning up at his Gisborne farm gate asking for food. My grandfather would hand over freshly-slaughtered meat, partly as a gesture of goodwill and partly to prevent poachers coming onto his land and stealing his animals. As a child my dad knew that his family were fortunate. They had plenty to eat, they could heat their home, they could push on through to the other side. They even managed to send Dad to medical school.
My father lived to be 81. He saw school friends head off to World War II and never come back (as a medical student he was required to stay at university and join the National Guard; he learned to thrust bayonets through haystacks.) He farewelled colleagues on their way to serve in medical corps in Korea and Vietnam. He lived through the horrible everyday suspicion of the Cold War, the social turmoil of the 60s, a truly awful plaid suit phase in the 70s, lost a bunch of money in the '87 crash, survived multiple strokes and indignities in his old age. He was a tough old bugger yet he never got over his fear of not having enough, of having to make do and scrape by; I would say it was the defining experience of his life. That is what a depression does. Let's count our lucky stars we're not in one now.