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Saturday, May 2, 2009

Current Crisis Shows Uncanny Parallels to Great Depression

What you may find in the excerpt are news you may have heard recently as history repeats itself. The current rally is our last chance to save some savings and prepare for the ugly part which is still due to come.

http://www.spiegel.de/international/world/0,1518,621979-5,00.htmlhttp://www.spiegel.de/international/world/0,1518,621979-5,00.html

the following excerpt from above link

Part 5: Underestimating the Crash

The large conference room at the Reich Chancellery at Wilhelmstrasse 77 in Berlin was filled with dignitaries from the world of politics and money. Contemporary observers reported that the mood in the room was extremely tense. As Hjalmar Schacht, the then president of the central bank, the Reichsbank, recalled, the bank directors were hurling "accusations at each other concerning their financial condition and business practices."

But the bankers downplayed the gravity of the situation in their discussions with politicians. Then-Deutsche Bank Chairman Oskar Wassermann even insisted that the situation among Germany's major banks was "no worse than anywhere else in the world." The bankers sought to portray the Danat failure as an isolated case and treated Goldschmidt "like someone with the plague," as then-Chancellor Heinrich Brüning wrote in his memoirs.

When Brüning asked the bankers about the condition of Dresdner Bank, "the question alone was perceived as an insult," as he wrote. Three days later, Dresdner was ready to be bailed out.

The events in Germany were mirrored in the United States. First the banks came down, followed by their customers -- manufacturers, department store barons and small businesses. After that, all economic activity went into a tailspin, something the modern world had never quite experienced before.

Global trade volume fell by 30 percent in three years, while industrial production shrank by 37 percent. It was a shocking experience for everyone involved, from beggars to businessmen.

The official unemployment figure in Germany rose to 6.1 million by February 1932, but real unemployment was in fact much higher.

Today's contractions in the overall economy and the labor market are relatively modest by comparison. The US economy is expected to shrink by 3 percent in 2009, while Germany will experience a significantly greater decline.

The comparisons between the current crisis and the Great Depression are indeed problematic. What exactly is being compared? One set of statistics represents the ultimate outcome of the Great Depression, but what do today's statistics signify? Perhaps merely the beginning of the current crisis?

In the late 1920s, the crisis began when it was underestimated. No one recognized the events of the day as the turning point they would eventually become. So much was whitewashed and so many people were placated. If speculation was the mother of the crisis, its father was naïveté. The players, says the economic historian Werner Abelshauser, lacked an "awareness of disaster."

At one point, on October 24, 1929, the Dow Jones index fell from 305 to 272 points. The next day, the headline in the New York Daily Investment News declared: "Stock Market Crisis Over." The chairman of the New York Stock Exchange continued his honeymoon in Honolulu.

The stock market would not hit bottom until three years later when, in July 1932, the index fell to 41 points. It would take the market another 22 years to reach its pre-crisis level.

Politicians at the time, not unlike politicians today, were notoriously optimistic at first. President Hoover heralded a recovery, but the real downturn was yet to come. When his successor, Franklin D. Roosevelt, came into office in 1933, he too believed that the worst was over -- and he too would be proven wrong.

President Obama, also unable to resist temptation, used the first halfway positive economic data to instill confidence in the public. In mid-April, he said the economy was showing "glimmers of hope," while his chief economic advisor, Lawrence Summers, said that the sense of "unremitting freefall" in the US economy had disappeared.

But that was before the IMF revised its forecasts drastically downward. By that point, there could be no question of an end to the crisis or even a reversal of the current trend.

When Obama gave a speech to workers in Iowa last Wednesday, the talk of glimmers of hope had already evaporated. This time, the president told his audience to be patient and bold, not to give up hope, and to believe in America's future. He looked tired. His staff said that he was still exhausted from his European trip.

In the decade following 1929, there were repeated signs of a recovery, and politicians were not the only ones to eagerly grasp at every hopeful opportunity. People believed that they had put the worst behind them, and yet their hopes were deceptive. An even bleaker future lay ahead.

Even John D. Rockefeller, the richest man of his day, was mistaken in his assessment of the markets. At the end of the week of the 1929 crash, he returned to the market and bought stocks, "believing that fundamental conditions of the country are sound." Last September, Warren Buffett, one of the world's richest men today, made a similarly hasty decision when he invested $5 billion (€3.8 billion) in the firm Goldman Sachs a little more than a week after the Lehman bankruptcy. He would have turned a decent profit if he had waited a while longer.

More than anyone else, President Herbert Hoover would go down in history for downplaying the Great Depression. In December 1929, he said that it was "the strong position of the banks" that had "carried the whole credit system through the crisis without impairment." But the real banking crisis was yet to come.

In May 1930, the president boldly announced that he was "convinced we have now passed the worst and with continued unity of effort we shall rapidly recover."

German Chancellor Angela Merkel seems to be doing her best to imitate Hoover. In the spring of 2008, she believed that the crisis would "perhaps not affect Germany." She was quickly proven wrong. A short time later, Merkel said that German banks were in good shape, and yet the first of those banks had to be rescued soon afterwards.

Perhaps the most astute contemporaries are those who withhold judgment. When asked the question: "Can you explain what has happened?" Robert Solow, a winner of the Nobel Prize in Economics, simply shakes his head and says: "No, I don't think that normal economic thinking can help explain this crisis."

In light of the difficulties in comparing a past depression with a depression in its embryonic stages, it is worth taking a look at the speed of the respective processes of disintegration. It is an exercise that exposes the raw forces that prevail.

The current downward spiral exceeds all previous downturns when it comes to its intensity and speed. The United States has experienced seven recessions since 1947, which lasted 10 months on average. It was only in 1982 and 1983 that the unemployment rate climbed to around the 10 percent mark.

But this time jobs are being destroyed at a rate that suggests the outbreak of an epidemic in factories and office buildings. Last August saw 640,000 people being added to the unemployment rolls, followed by 629,000 in October, 255,000 in November and 632,000 in December, and the rate of new unemployment has continued unabated ever since. The US economy is currently losing about 700,000 jobs a month. At this rate, the 10 percent threshold will likely be exceeded at a gallop.

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