This Recession is different from the Great Depression

The current recession has fundamental differences from the Depression of the 1930's. This thread is not about comparing the severity of the recession to the Depression, but rather looking at the differences in root cause and fundamental behavior.

The price of housing is an excellent indirect indicator of the wealth of the middle class. Of course, it takes some interpretation. Low or falling prices means people do not have the purchasing power to buy houses, while high prices could potentially mean higher costs of living, and thus decreased purchasing power (people need to earn more money to pay the higher costs or rent and mortgage payments). Generally, if home values in in the transition of rising, there is plenty of job opportunity, while less opportunity is usually the cause of decreasing housing prices.



As can be seen, the price of housing rapidly and unprecedentedly rose just prior to the current recession, while there was no such phenomena prior to the Depression.

Now here is the question: What contributed to the current problems more, the rise in housing prices, or after when the prices fell from their peak? I suspect the former, in contrast to most other mainstream economists.

Housing became unaffordable to many people. This is likely one of the main reasons for lower fertility rates (at least among middle class whites), which started decreasing many years before, as people delayed marriage, and families delayed having children so the woman could pursue a good paying career to help the family save enough money.

It should be remembered that housing prices themselves are not necessarily good or bad. Low prices means people can more easily afford houses, while rising prices can benefit people who own real estate.

The interesting thing is that the house price graph has an unusual relationship with war. Housing prices began to fall with the start of the first world war, but contrastingly began to increase after the start of the second war. No doubt there seems to be some sort of inexplicable correlation. The small booms of the 70's and 80's both appear to have been unsustainable bubbles, rather than long term trends.

I also doubt that the huge rise in housing prices in the last few years is believable. Remember that this graph is "inflation adjusted". It is my opinion that the graph would be much less warped if the actual inflation, that has really been going on in the last decade, was realised. I think the value of the US dollar has drastically fallen, and economists will not admit it. (do not try to compare the dollar to the Euro, the Euro has also been losing much value)

 

Someone from America told me that all the cheap Chinese imports are disguising the true inflation that has been going on. He said that if he had to buy two bars of soap that where actually made in the USA, it would take him a whole hour working for minimum wage to buy it. Is this really true?

 

Fundamentally it was not so different from 1929. A market bubble followed by a liquidity crises. As economic calamities go it was fairly typical.

The only real difference was that the over leverage was in the housing market this time instead of the equity market. Otherwise it was the same, an investment bubble frenzy that drives up prices and creates massive banking liquidity problems when it burst.

The banks had been precluded from participating in the equity markets since the Depression and so financed home loans. Equity investors had not been precluded from the housing market though, a loophole that led to a bubble that brought down the banks again.

 

But take a look at that huge spike in house prices in the last few years on that graph, relative to the past. Yes, there was a housing bubble, but is the magnitude of the spike shown on the graph really plausible?

I am just saying that perhaps economists make mistaken a huge rise in inflation for part of the housing bubble. Remember, that graph is "inflation adjusted". That spike would not be so big if the inflation rate they used was revised upward.

There is great concern from American citizens, and the rest of the world, about inflation, but most of the economists keep saying there has been no inflation, and that they worry about deflation. All the while the Treasury is churning out more and more US dollars, all backed by more government debt.

Is it not possible that there is significant inflation happening, and that economists cannot see it because is just being masked by falling wages and cheap Chinese imports? And could it be possible that this inflation is greatly contributing to the current economic problems?

http://mises.org/daily/2302

 

The Great Depression and the current situation are not so different from each other.

The following is a fascinating interview about the parallels between the two. Its a long read, but full of great data.

http://www.ritholtz.com/blog/2012/0...ampaign=Feed:+TheBigPicture+(The+Big+Picture)

Here is a snippet:

Yes, Friedman even said Fisher was the greatest American economist, and I think that is correct. Fisher had a broader understanding of the economy in a very, very critical way and in a way that I don’t think either Friedman or John Maynard Keynes understood it, and even a lot of contemporary economists, such as Ben Bernanke. Keynes and Friedman both felt that The Great Depression was due to an insufficiency of aggregate demand and so the way you contained a Great Depression was by your response to the insufficiency of aggregate demand. For Keynes, that was by having the federal government borrow more money and spend it when the private sector wouldn’t. And for Friedman, that was for the Federal Reserve to do more to stimulate the money supply so that the private sector would lend more money. Fisher, on the other hand, is saying something entirely different. He’s saying that the insufficiency of aggregate demand is a symptom of excessive indebtedness and what you have to do to contain a major debt depression event — such as the aftermath of 1873, the aftermath of 1929, the aftermath of 2008 — is you have to prevent it ahead of time. You have to prevent the buildup of debt.

And that your goose is cooked if you don’t you cut off the credit bubble before it overwhelms the economy?

Yes, and Bernanke is thinking that the solution is in the response to the insufficiency of aggregate demand. That was Friedman’s thought. That was Keynes’ thought and most of the economics profession has traditionally thought the same way. They were looking at it through the wrong lens. Fisher advocated 100% money because he wanted the lending and depository functions of the banks separated so we couldn’t have another event like the 1920s.

You’re saying that Fisher argued against fractional reserve banking?

Yes, and so did the people that more or less followed in Fisher’s footsteps, principally Charles Kindleberger and Hyman Minsky. Minsky felt that the way you prevented a major debt deflation cycle was to keep the banks small.

Prevent them from ever becoming too big to fail in the first place?

Right. Don’t let them merge. You don’t want them to get big. I actually gave a paper with Minsky once, in 1981, in which he advocated that position. Kindleberger was very precise in “Manias, Panics, and Crashes,” when he said that when you have a small credit problem, or many small problems, some say, you don’t want the Federal Reserve to respond. Because if the central bank comes in and bails out a small problem, then that will be a sign to those who want to take more risk that they don’t need to be cautious — they can always count on the central bank to come in and bail them out. If they do, Kindleberger said — and this was in ’78 — then the future crisis will be even greater. “A free lunch for speculators today means that they’re likely to be less prudent in the future. Hence, the next several financial crises could be more severe.”​

 

There is a big difference between a price bubble and general monetary inflation.

 

If there is a "lack of demand", would it not be better for the government to just hand out free money to everybody? Individuals are usually much better at spending money than the government.

Growth in population = limited housing near hubs of economic activity where the jobs are = increased cost of housing = inflation

If price of housing goes up, mortgages get bigger, loans get bigger, causing expansion of the money supply (if not by private banks then when the federal reserve indirectly buys these mortgages in blocks through loans to private banks).

Increased cost of housing = increased cost of living (employees need higher wages to pay rent) = reduced purchasing power of dollar = inflation

 

That is what stimulus spending is all about.

Not all increases in prices are due to inflation. The size of the average new home has grown considerably over the years so people pay more but also get more. It is similar with cars, today's cars are much higher quality, more efficient and more durable. Workers are more efficient so they can be paid more.

Higher prices for greater value are not inflation. This is not to say that there is no inflation, just that increased prices and wages are not all due to inflation

 

Never before the number of houses that have been built is so high as today. And they have been taken away the rented houses, most are now private housing (they throw the housing and car propaganda at the masses as never before since 2001, because they must sell cars for the oil and must sell houses for their banks (monopoly means more and more power)
They have cause a super boom, means they have almost gathered all the wealth there is in the (capitalistic) system. The recessions and economic problems are caused on purpose (by design) (because they almost own all the wealth, no need for an economic problem) They also do not switch to the real green and alternative energies there are and boycot the electric and hydrogen car/plane industry.
This is all done by design to bring the system down, and cause recession, and make the people depressed by all this (they know emotion of the masses)
Tyranny, the Germans have seen it before, it is all happening all over again since Reichstag event 9/11 (the terror/fear was also a thousand times worse then in Rome and Germany) This year everything will go down very deep, they could pull the plug just before election day (to have the masses as angry and depressed as never before, to reach that absolute power (a large majority that cast their vote on 'their messiah'.) Will the people really vote in mass in the same way as the German people did? When people are angry and depresses they will.
History/tyranny is repeating.

 

ARM's losing popularity...

Are Adjustable-Rate Mortgages Dying?
2/17/12 --- Up to 95% of mortgage refinances are for fixed-rate mortgages, even though ARMs may be better in the short term.

 

I think there are a lot of other factors going on..

1. Housing has changed.. a lot. Houses built in the 20's-60's were markedly different from those being built in the 90'a-2000's.

2. Money has changed. We had a much more stable currency early last century, & it devalued in spurts throughout the era. How would this chart be if gold, not adjusted dollars, were used as the base?

It's definitely a tough time we're in. ..hard to know where we're going.. even if we can see how we got here.

 

A lot of people got screwed when their ARMs reset in the period from 2007-2010. Their mortgage payments doubled overnight and there was no refinancing available from anywhere to get them out of it. The horror stories are widespread and well known.

It went against the whole reasoning behind the sale of ARMS, that they could be easily refinanced before their interest rate was reset higher. Everyone now knows that this is not true so most people who buy homes these days do not consider ARMs predictable or reliable.

 

I never understood why people were using ARMs during the 2003-2008 period. The rates were already so low that an ARM had no where to go but up. The borrowers had to know that their rates - and thus their payments - were bound to go up.