Monday, February 16, 2009

The Great Depression and the New Deal – Comparison Current Economic “Crisis”

The Great Depression was brought about by several factors including a breakdown of the Gold Standard a system whereby governments “back” their printed currency with gold. In the late 1800’s, Democrat William Jennings Bryan, a Congressman ran an unsuccessful campaign for the Presidency against William McKinley, based on removing the Gold Standard. The Gold Standard Act was repealed in 1933, under President Franklin D. Roosevelt.

The Market Crash of 1929 followed another depression in the late 1880’s, the nation’s spirits were high after World War I, spurring investments and “stocks” were traded without any regulation. When the market crashed in 1929, consumers became reluctant to invest, credit was available, and the Federal Reserve banking regulations were not effective. This led to bank failures - in the first 10 months of 1930, 744 US banks failed and 7 billion dollars in deposits had been frozen (Bank Holiday). As the failures continued (9000 banks total), borrowers did not have time to repay loans, construction ceased, and those banks that did survive instilled strict lending practices. Simply put it was currency with no backing, a subsequent lack of credit, and panic from the consumer that drove the country downward.

The fix was the “New Deal”, a program devised by President Roosevelt that put American’s back to work – the unemployment rate was at 25% - his stimulus included infrastructure projects that allowed able bodied American’s that did not have a job, to build highways, women were put to work in factories making low-cost clothing. He instituted social security for those too old to work, and all programs he instituted were thought to be “temporary” – once the economy righted itself, the “dole” would end.

F.D.R. must be doing 360’s in his grave.

How does today’s economic crisis and the subsequent “American Investment and Recovery Act”, compare to that of the 1930’s? It is true that there has been an economic downturn, specifically regarding Wall-Street; however, the market has not “crashed”. The effect of the lax lending practices of major banks required by Federal laws, effectively led the default of loans and subsequent foreclosures in the housing market. Fannie Mae and Freddie Mac, government “banks” for all intents and purposes, were the first to go under; and as larger private banks bought the “toxic” assets from failing institutions, they too needed a bit of aid from the government. Consumers are, right now, reluctant to make major purchases, and several banks have been closed, but the scope and the numbers are not sufficient to make a valid comparison between the two economic crises. The intent of the TARP was to free credit, however, without oversight, some banks who received funds did little to nothing to ease the credit necessary to keep retail and other sectors moving and layoffs followed. The panicked reaction of both the Bush and Obama administrations further exacerbated the problem. It had not, however, reached the proportion of the 1930’s – enter the Stimulus – indeed there is some job creation (short-term) in the bill, however, most of it is special projects otherwise known as “pork” – additionally, the creation of bureaucracies to oversee programs have created jobs with the Federal Government. There is tax breaks included, for those not currently paying taxes, and those paying taxes are receiving so little ($13.00 per week), that it would not fill a gas tank, let alone, instill consumer confidence. Temporary work programs serving all facets of the nation’s economy intended to alleviate a high rate of unemployment (a true New-Deal approach), is not included in this Act.

Now the question remains, as there are few valid comparisons between the 1930’s and today, will the Administrative Panic of 2008-2009, insure that the nation will slump further, with little to no tax relief for individuals and corporation that drive the economy? That remains to be seen – however, should this package prove to drive the middle class taxpayer to the brink, political fortunes of those who took the New Deal out of scope, and made the decisions this past weekend I the Senate, may end up poisoning an entire Political party.

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