Despite fears, another Great Depression is unlikely
By Jay Loomis
Westchester (N.Y.) Journal News
A fragile economy and two-and-a-half years of steep investment losses are leading to once-unthinkable allusions to the mother of all busts: the Great Depression.
Bloomberg News Service
To some Wall Street pros and economists, any comparisons seem misplaced. The American economy, stronger and more diversified than it was 70 years ago, has more checks and balances to avoid a repeat of 1930s-style bread lines and bank closings.
Traders worked the New York Stock Exchange floor last week as the current bear market entered its 29th month. The weakness of the market has begun to invite comparisons to another painful economic period.
Yet by key yardsticks, the present market slide is the most brutal since the 1930s:
• Now in its 29th month, the bear market trails only two Depression-era slumps as the longest of the past century. It's nearly twice as long as the average bear market since World War II.
• Some analysts are noting a similar pattern in the 89 percent plunge in the Dow Jones industrial average from its 1929 peak and a 77 percent drop in the Nasdaq stock market from its high of March 2000.
Investment bubbles aren't new. In the panic of 1873, U.S. banks failed as fear engulfed the nation. Since 1945, there have been at least 11 bear markets in which stock prices slumped 20 percent or more.
"A crowd psychology has underlined meltdowns throughout history," said Steve Hochberg, of Elliott Wave International, a forecasting firm in Gainesville, Ga. "Human nature doesn't change. People are people. We all get bullish together and we all get bearish together."
A comparison of the 1920s and 1990s shows intriguing similarities.
Mania over the Internet, cellular phones and Palm Pilots sent the Nasdaq soaring 441 percent from 1995 to '99. People forgot about the fundamentals — profits — as they invested in money-losing dot-coms built on phantom promises of a "new economy." It was a similar phenomenon during the Roaring '20s, a time when many families bought their first cars, radios or washing machines. The gadgets fueled Wall Street's mania. One of the hottest stocks, radio maker RCA, zoomed like a dot-com.
Newly minted millionaires buying luxury cars and mansions; a binge of consumer and corporate credit; predictions that stock prices would defy gravity; scandals involving brokerage houses and corporate executives — all were realities of the 1920s and the 1990s.
As the 1920s ended, "something like 40 percent of stock market values were pure hot air: prices above fundamental values for no reason other than a wide cross section of investors thought the stock market would go up because it had gone up," writes J. Bradford DeLong, associate economics professor at the University of California-Berkeley, in a research paper.
The bubble burst spectacularly on Oct. 29, 1929, as panicked traders dumped shares by the millions. By 1933, unemployment topped 25 percent, forcing the destitute to move into makeshift "Hoovervilles" or travel the country on freight trains. Forty percent of all banks failed. Economic output fell 40 percent; high tariffs aggravated the global malaise.
Shock absorbers added as a result of the Depression — unemployment insurance, welfare, Social Security, federally insured bank deposits — are designed to limit the damage from downturns today, economists say. Federal spending is about 20 percent of the economy today compared with 2.5 percent in 1929.
"In the 1930s, federal officials had no clue about how to deal with a downturn," said Charles Lieberman, of Advisors Financial Center in Suffern, N.Y. "The government has more tools at its disposal now."
In the 1930s, factories produced more goods than the public consumed. The result of the glut was a brutal shakeout of factory closings, job cuts and deflation averaging 10 percent a year.
Today, there are gluts of production in the steel, telecommunications, computer and airline industries, but "it's not total decimation across the board like you saw during the '30s," said Jeff Hirsch, editor of Almanac Investor in Old Tappan, N.J.
The biggest uncertainty is how long it will take investors to recover the tech losses. Based on other bear markets, it can take years to get even. After the 1929 crash, it was 25 years before the Dow climbed above its old peak.
"It will take the better part of the decade for the economy to work off its excesses in production capacity," said Srinivas Thiruvadanthai of Jerome Levy Forecasting Center. "We see a long period of sub-par returns in the stock market for the next five years, certainly much less than what investors have grown to expect."
