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The Great Depression of 2008 to

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Is something like the Great Depression likely to happen? A Lot of Overwrought Discussion ... 'The Great Depression Hoax', Wall Street Journal, Todd G. Buchholz, ... – PowerPoint PPT presentation

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Title: The Great Depression of 2008 to


1
The Great Depression of 2008 to ?
  • Gerald P. Dwyer
  • February 2009

2
Who Is Speaking?
  • These views are mine and not necessarily those of
    the Federal Reserve Bank of Atlanta or the
    Federal Reserve System.

3
Questions
  • Are we in a depression?
  • Are we at the beginning of a depression?
  • Is something like the Great Depression likely to
    happen?

4
A Lot of Overwrought Discussion
  • Associated Press report
  • Retail sales fell off a cliff in September
  • plunging by the largest amount in three years
  • How much?
  • 1.2 percent

5
Layoff Announcements
  • a week that saw hundreds of thousands of
    people lose their jobs Associated Press,
    January 31, 2009
  • What were announcements in Wall Street Journal
    last week?
  • 1/29 1,200 Ford Credit
  • 1/29 700 AOL
  • 1/27 2,800 IBM
  • 1/26 8,000 Sprint Nextel
  • 1/26 20,000 Caterpillar
  • earlier
  • 1/23 5,000 Microsoft
  • 1/23 1,100 Harley-Davidson
  • In December, there were 2,275 mass layoff
    actions, involving 226,117 workers. (U.S.
    Department of Labor, January 28, 2009)

6
Not only reporters
  • Joseph Stiglitz, a Nobel Prize winning economist,
    last Summer said the economy was in the worst
    recession since the Great Depression
  • The Great Depression Hoax, Wall Street Journal,
    Todd G. Buchholz,

7
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11
Developments
  • Layoffs
  • Decline in GDP at an annual rate 3.8 percent in
    fourth quarter, 2008
  • Cuts in state and local budgets across the U.S.
  • Runs on money market funds

12
Run on Money Market Funds
  • Money market funds are similar in some ways to
    banks
  • Generally give you back a dollar on demand when
    you deposit a dollar in them
  • Prime Reserve fund failed to do that on September
    17, 2008
  • People started taking their funds out of money
    market funds

13
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14
Source http//www.thetruthaboutmortgage.com
15
A Depression?
  • A repetition of the catastrophe of the Great
    Depression today is practically impossible.
  • Gottfried Haberler, Prosperity and Depression,
    1963, Preface

16
Source http//sanddollaradventures.wordpress.com
17
Source http//www.flatrock.org.nz
18
Pigs Flying and Depression
  • Wont say that a depression cant happen
  • Wont say that pigs cant fly
  • Depends on what we mean by flying
  • Will say that the economy definitely is not in a
    depression now

19
What Is A Recession?
  • Business economists definition
  • Two quarters of real GDP decline
  • National Bureau of Economic Research definition
  • A significant decline in economic activity spread
    across the economy
  • Lasting more than a few months
  • Normally visible in real GDP, real income,
    employment, industrial production, and
    wholesale-retail sales.

20
What Is A Depression?
  • A severe recession
  • President Harry Truman 1958
  • A recession is when your neighbor loses his job
  • A depression is when you lose your job
  • Dictionary
  • A period of low general economic activity marked
    especially by rising levels of unemployment
  • About.com
  • A 10 percent decline in real GDP

21
What Is A Good Definition of a Depression?
  • There is no sharp dividing line between
    depression and recession recession simply
    denotes a mild depression.
  • Gottfried Haberler, Prosperity and Depression,
    1963, Preface

22
Great Depression of 1929-1933
  • May have been the most severe contraction in
    economic activity in U.S. history
  • Real Gross Domestic Product fell by a third
  • Prices fell by a quarter or more
  • Stock prices fell by 75 to 90 percent

23
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26
What Caused the Great Depression?
  • Repeated runs on the banking system
  • Federal Reserve dealt with them poorly
  • Other policies were not so great either
  • Repeated attempts to try to patch financial
    system
  • National Recovery Administration to raise prices
  • And reduce output
  • Increases in tax rates
  • Smoot-Hawley tariff
  • May even have contributed to the stock market
    crash

27
Current Problems
  • Banks are not sure which other banks are solvent
  • Banks not lending to each other
  • Makes it harder for a bank to be sure it will
    have funds
  • Difficulty valuing some securities related to
    mortgages
  • Troubled securities toxic securities
  • Hard to know which firms are solvent and which
    are not

28
Current Policies
  • Federal Reserve is lending reserves to banks
  • Troubled securities
  • Federal Reserve has been taking troubled
    securities as collateral and lending Treasury
    securities to financial institutions
  • Treasury probably will be buying some troubled
    securities
  • Treasury probably will be providing insurance on
    some troubled securities
  • Treasury has bought preferred stock in some banks

29
Great Depression WasVery Persistent
30
What Made the Great DepressionSo Persistent?
  • Had the laws of supply and demand been repealed?
  • The government
  • Failed to deal with bank runs that disrupted
    money and credit system
  • Organized firms to raise prices
  • Organized workers to raise wages
  • Introduced price supports for farmers
  • Raised tax rates substantially and frequently
  • Restricted foreign trade

31
Depression in U.S.?
  • Does the economy reflect difficulties that are
    liable to persist for a while?
  • Yes
  • Are we in a depression?
  • NO!
  • Could we have a depression?
  • There is not too much reason to predict one at
    this point
  • Could we have another Great Depression?
  • Would require dramatic policy errors
  • A repetition of the catastrophe of the Great
    Depression today is practically impossible.
    Gottfried Haberler
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