The Recession, Will it Become a Great Depression?

The US recession of 2008/2009 is a growing concern for the government. Of course, economies though are made up of people and cannot be run by models, but rely on psychology. When the US House of Representatives rejected a bailout in 2008, Dow Jones took a dive of 777 points. Although a revised bill was accepted the market still went down. This is what I mean by psychology, bad news creates fear, and as Franklin D. Roosevelt said "we have nothing to fear but fear itself." But never fear, I'll tell you about the history so that you know not to worry.

While liberals are jumping all over the internet, blaming President Bush for "sticking his head in the sand and not acknowledging the recession" they are being naive in the fact that, if it was a Democratic president, they would have the same policy of promoting optimism, as President Franklin D. Roosevelt did and as President-Elect Barack Obama will do.

The president must be calm and promote optimism in the market while at the same time seriously solving the problems in the background. DailyKos a liberal blog tries to say that president Bush was not acknowledging the recession and calling it a "slow down" and hence should be condemned.

However, there exists a problem for DailyKos and their credibility, at the time he said slow down, it really was a slow down of growth and would not be considered by any economist as a recession. Warren Buffet concludes that is a common-sense definition of recession, but he himself admits that it has not been a recession yet. Regardless, it has now become a recession, but why argue about when a recession starts unless you are just trying to play the blame game.

We now know that president Franklin D. Roosevelt as always suspected and know widely acknowledged did not stop the Great Depression, and in fact prolonged it; although, he did his best to store confidence to the people by doing various obsolete Keynsian economics combined with his Socialist-like New Deal plan, which was really a psychological warfare to make it look like the government was trying to solve the problem.

Investors at the time were afraid of spending their money, . Franklin D. Roosevelt's incredibly high (near 80% I believe) taxes for the very wealthy did not help the situation or the investors confidence. President Roosevelt also used this high amounts of money to promote public works, infrastructure, parks, as recommended by Keynsian economics. It didn't help, and it may have made it worse according to recent research.

Remember, that everyone blamed Herbert Hoover for the Great Depression at the time and Franklin D. Roosevelt actually ran his political campaign exclusively blaming Herbert Hoover for everything wrong with the country. Similar to how now President-Elect Barack Obama blamed everything and the kitchen sink on President George W. Bush.

But as Mark Twain has said "History doesn't repeat it just rhymes," so just because there are thousands of parallels between that time period and ours doesn't mean we are headed for a Great Depression.

However, let's examine the Great Depression first, and figure out what caused it; now I know there is much debate over which ones were the real cause and which ones were minor ripples that came with a bigger ripple. Let me also remind you that I do not know the exact cause either, but I am giving you a wide range of likely causes.

What Caused the Great Depression?

1. Stock Market Crash of 1929 - In the month of October, stock prices fell, and the fear spread like wildfire, and though I am unable to determine the exact cause of this fear, the technology at the time caused everyone to panic and rumors to spread, investors feared losing their money and everyone withdrew their money from the stock market.
2. Great Britain Returning to Gold Standard - Britain tried to return to the Gold standard.
3. Debt Deflation - this is when banks stopped giving out loans and banks calling in their borrowers to pay their debts and frantic selling in markets leading to deflation.
4. US Money Supply - Federal Reserve stopped putting money into the system thinking it would help at the time, in other words, they didn't bail people out.
5. Trade Decline - Tariffs by many countries and other protectionist policies caused a major decline in world economy.

These are some of the factors that maybe in a combination caused that terrible depression.

There are other theories, but they are indeed unrealistic:

• Businesses (FDR's explanation that Wall Street corruption caused it on it's own; if that were true then we'd have great depressions that lasted 100 years! Greed is always a factor in Wall Street; the current financial crisis and housing market crisis was caused by the greed of Bankers who lent money but also the Democratic politicians who opposed regulation)
• Austrian School of Thought: Expansion of Money Supply by US Reserve during the 1920s creating inflation and causing an inevitable spiral to a depression (a little far fetched, considering inflation rose sharply during Carter's administration and it didn't exactly become a depression, I'd think it takes a lot more than that.)
• Marxist theories - Apparently, in capitalism money is limited hence the market cannot control where wealth is accumulated and thus depressions and recessions are likely to happen. (Yes, perhaps if some millionaires decided to store their cash in a shack; meanwhile with marxism you're living in a great depression the whole time!)

The Great Depression was tragic. However, the debate rages on with the exact causes and why it took World War II to get us out of the Great Depression. Most likely because President Roosevelt used socialist policies and Keynsian economics which when I read it sounds like a really terrible plan.

What did Keynsian economics do?

The government used fiscal policy and taxation to increase federal budgets and they invested it in public works projects and infrastructure development among other projects to create employment. That not only did not restore confidence to investors but it actually made it worse as people would be forced to take jobs like construction worker when they have a higher degree of education.

It didn't help, it simply made the problem worse. Only until World War II did the United States really get out of the Great Depression.

Can a Great Depression occur Again?

I don't believe so, in 1929, technology was very new. There was only two ways of getting news: Radio and Newspaper, and they both promoted fear of more economic problems, contributing to the stock market crashes in the days following the first crash on October 28th, 1929.

Rumors spread like wildfire, telephone lines were clogged during the crash days creating more fear, people just repeating each other "Sell, sell, sell!" creating a frenzy of selling and causing deflation.

During the time, several factors were combined to form the Great Depression, I refuse to think it was one single cause. High taxes, prolonged the Great Depression and Keynsian economics didn't help.

Not to mention, the 20s were really funded by the wartime economy created by World War I, and it was bound to run out of fuel even a little bit, especially when Germany was borrowing high amounts of money from US banks to pay war debts.

The no-bailouts policy also created a shortage in money supply, which Keynsian economics was trying to correct by making the government invest through public works, which may have eased the pain a tiny bit.

A Great Depression can occur again, maybe following a catastrophic war or natural disaster or nuclear warfare; perhaps, if a combination of market crashes and widespread panic and fear, including lack of proper government response.

Don't Worry

In today's technological age of quick information, the governments are better able to do their job, at a much faster rate in comparison to the 1930s.

Rumors don't spread as fast, because they are lost in the flood of information on the internet and multiple news channels with different political views.

Federal Deposit Insurance Corporation insures bank deposits, so unlike in 1929-1930 when people had to rush to the banks to get their money from it, and banks had to actually close their doors and maybe even barricade them, our deposits are more or less safe for the first $250,000.

Government is bailing out banks so that they will not have a situation where lenders will have to call in their debts. The bailouts also should force the banks to continue lending, because in 1929 and 1930 banks had no money to lend and they didn't lend, which really put a freeze on investment and economy.

People like to predict Depressions and Recessions, they like to say "I called it" if it does indeed happen, the reason is, if they are wrong they can simply say "Sorry, I exaggerated." Do not fall for it. Do not assume that we are in a doom and gloom situation and panic.

In my opinion, the media should be talking to economists that want to calm us down, telling us about the optimism in the market rather than the pessimism. President Bush is trying to do this while at the same time solving the financial crisis. The media however, is as always painting a dooming picture and promoting panic and fear, neither Franklin D. Roosevelt, Barack Obama, nor George W. Bush would approve.