Banking Crisis Dwarfs Depression

Assets for failures for this crisis total $7.1 trillion to date. This is nearly eight times the assets compared with the inflation-adjusted total for the S&L crisis.

The data for bank failures in the Great Depression is shown in the following table. The total deposits involved were about $7.6 billion over a span of 13 years. Adjusted for inflation, that is $100 billion in 2009 dollars. The size of the crisis today, adjusted for inflation, is more than 70 times larger than the entire Great Depression. Because branch banking was quite uncommon in the 1930s, 10,000 bank closings then would be equivalent to a smaller number today.

When we adjust for population we get the results shown in the following table.

The S&L crisis was about five times bigger than the banking crisis of the Great Depression. The current crisis is about 25 times larger than the Great Depression. Both are per capita, adjusted for inflation. The current crisis is so large because the financial sector has grown to unprecedented economic dominance. The financial sector constituted 45% of earnings for the S&P 500 in 2006. If half of your eggs are in one basket, your diet becomes very restricted if you drop that basket.

The following table looks at layers in the banking crisis.

Every layer is much larger than the Great Depression banking crisis.

The New York Times reported over the weekend that Christopher Whalen, managing director at research firm Institutional Risk Analytics, has given a failing grade to 1,882 banks as of June 30. Whalen said that the assumed loss rate used in the Treasury's stress tests already has been reached and the peak of the cycle has not. If half of these failing grades ended up as bank failures, this crisis could approach the 1,043 S&L failures.