Thursday, October 16, 2008

This is Not Like the Great Depression

Although our optimism that there is light at the end of the tunnel for the current global financial crisis continues to be tested, there is one expressed parallel that is not evident. A major precursor for the Great Depression of the 1930s was the Immigration Reform and Control Act of 1925 which shut the door. Growth in the US population which had averaged nearly 3 per cent per year fell quickly to much less than 1 per cent. Housing starts, which totaled 900,000 in 1926, fell to 300,000 by 1929, the year of the stock market crash. The restriction on the international movements of people paved the way for restrictions on international trade via Smoot-Hawley. The Fed raised interest rates and reduced liquidity to the financial system.

None of the above exists today – a very positive fact. There is grousing about current account deficits in the US and surpluses in Asia but no one is even hinting at imposing restrictions on the movements of people and/or goods as occurred 80 some odd years ago. Be that as it may, it would be a major mistake to have America go on a diet and Asia to binge given the major imbalances in their demographic positions. Asia needs even larger surpluses to help them prepare for their very rapid aging.


Sanjay Jagatsingh said...

So, compared to the Great Depression, US policy-makers have made fewer policy errors in the current crisis but greed has become more creative?

Richard Hokenson said...

It seems that greed has always been creative. For example, the financial market crash of 1907 was precipitated by banks exploiting regulatory loopholes. I think that the principal difference between then and now is that computerization has allowed the "
rocket scientists" on Wall Street to step up the pace.

Sanjay Jagatsingh said...

Probably. The other very important piece of technology used to create this mess and the previous ones is of course the good old boardroom table especially when it's populated with regulators and investment bankers rationalising totally dumb modifications to absolutely essential pieces of legislation.