The Great Depression and Great Recession

October 3, 2011Jim Butkiewicz

University of Delaware

Comparisons

The recent Great Recession has resulted in significant economic losses and personal suffering

Still, the Great Depression was far worse

1 2 3 4 5 6 7 8 9 10 11 120

20

40

60

80

100

120

140

Real GDP

Depression

08-09 Crisis

Years (Year 1 is peak)

Va

lue

re

lati

ve

to

cy

cle

pe

ak

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20

40

60

80

100

120

Consumer Prices

Depression

08-09 Crisis

Months (Month 1 January of peak year)

Va

lue

re

lati

ve

to

pe

ak

1 2 3 4 5 6 7 8 9 10 11 12 13 14 150

5

10

15

20

25

30

Unemployment Comparison

Depression

08-09 Crisis

Years (Year 1 is cycle peak)

Ra

te (

Pe

rce

nt)

Recovery from the Depression

Treasury’s expansionary monetary policy

1919 1924 1929 1934 19390

50

100

150

200

250

IIP*CPI and M2

IIP*CPIM2In

dex

Recovery from the DepressionTreasury’s expansionary monetary policyFiscal policy not expansionaryBank lending stagnant $20 - $22 billionFederal lending by new agencies

◦Home Owner’s Loan Corporation◦Federal Farm Mortgage Corporation◦Reconstruction Finance Corporation◦Commodity Credit Corporation◦U.S. Housing Authority and Federal Housing

Administration

1916

1917

1918

1919

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Gross Federal and Agency Debt - % of GNPP

erc

en

tag

e o

f G

DP

US Gross Debt

US Gross and Agency Debt

0

10

20

30

40

50

60 US Federal DebtB

illion

s of

$

Combined US and Agency Debt

US Gross Debt

The Great RecessionThe downturn was due to a real shock – the

bursting of the housing bubbleInitially expansionary monetary response

became contractionary, but has since reversed

Impact of fiscal stimulus questionable◦State and local governments constrained and

have significant unfunded liabilitiesFiscal policy now constrained unlike

depressionBank lending a constraint

1999

-01-

01

1999

-06-

01

1999

-11-

01

2000

-04-

01

2000

-09-

01

2001

-02-

01

2001

-07-

01

2001

-12-

01

2002

-05-

01

2002

-10-

01

2003

-03-

01

2003

-08-

01

2004

-01-

01

2004

-06-

01

2004

-11-

01

2005

-04-

01

2005

-09-

01

2006

-02-

01

2006

-07-

01

2006

-12-

01

2007

-05-

01

2007

-10-

01

2008

-03-

01

2008

-08-

01

2009

-01-

01

2009

-06-

01

2009

-11-

01

2010

-04-

01

2010

-09-

01

2011

-02-

01

2011

-07-

01

2011

-12-

01

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Real GDP and M2 Growth RatesG

row

th R

ate

(Y

ear

over

year)

M2 Growth (1 Year Lag)

Real GDP Growth

You are known by the company you keep

1999

-01-

01

1999

-06-

01

1999

-11-

01

2000

-04-

01

2000

-09-

01

2001

-02-

01

2001

-07-

01

2001

-12-

01

2002

-05-

01

2002

-10-

01

2003

-03-

01

2003

-08-

01

2004

-01-

01

2004

-06-

01

2004

-11-

01

2005

-04-

01

2005

-09-

01

2006

-02-

01

2006

-07-

01

2006

-12-

01

2007

-05-

01

2007

-10-

01

2008

-03-

01

2008

-08-

01

2009

-01-

01

2009

-06-

01

2009

-11-

01

2010

-04-

01

2010

-09-

01

2011

-02-

01

2011

-07-

010.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

8000.0

Total Loans & Leases - All Commercial BanksB

illion

s of

$

Remaining Hurdles

Administration’s anti-business attitude and policies (Obama similar to FDR)◦Uncertainty regarding health care policy◦Uncertainty about regulation◦NLRB – Boeing decision

Continuing housing deflation

1880 1900 1920 1940 1960 1980 2000 20204

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9Nominal House Prices and Consumer Prices

Year

Log

arit

hmic

Val

ue

House Prices

Consumer Prices