Tuesday, September 23, 2008

"Those who cannot remember the past, are condemned to repeat it"

Santayana was right.

I don't agree with everything this article says, but the parallels between 1929 and today are shocking.

For example:

Modern industry had the capacity to produce vast quantities of consumer goods, but this created a fundamental problem: Prosperity could continue only if demand was made to grow as rapidly as supply. Accordingly, people had to be persuaded to abandon such traditional values as saving, postponing pleasures and purchases, and buying only what they needed.... Advertising methods that had been developed to build support for World War I were used to persuade people to buy such relatively new products as automobiles and such completely new ones as radios and household appliances. The resulting mass consumption kept the economy going through most of the 1920s.

Mass consumption fueled by pervasive advertising. Hmmm...


To get around this difficulty, the 1920s produced another innovation—“credit,” an attractive name for consumer debt. People were allowed to “buy now, pay later.” But this only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines. That day came in 1929.

That day also came in 2008.


[Banks] lent heavily and unwisely to borrowers in Europe...who would have difficulty repaying the loans, particularly if there was a serious economic downturn. These huge debts made the international banking structure extremely unstable by the late 1920s.

Replace "borrowers in Europe" with "sub-prime homeowners" and "1920s" with "2000s" and we're right on target.


The stock market crash announced the beginning of the Great Depression, but the deep economic problems of the 1920s had already converged a few months earlier to start the downward spiral. The credit of a large portion of the nation’s consumers had been exhausted, and they were spending much of their current income to pay for past, rather than new, purchases.

This is also true today.


Many banks had made loans to businesses and people who now could not repay them, and some banks had also lost money by investing in the stock market. When depositors hit by the depression needed to withdraw their savings, the banks often did not have the money to give them. This caused other depositors to panic and demand their cash, ruining the banks. By the winter of 1932 to 1933, the banking system reached the point of nearly complete collapse; more than 5,000 banks failed by March 1933, wiping out the savings of millions of people.

We're not quite there yet, but we're getting much closer. The FDIC insures people up to $100,000 per bank. But what if too many banks go under? The government doesn't have that kind of money. It'll have to print it, devaluing all money. What a mess.

No comments: