Though stock prices have been falling on Wall Street, it’s still unclear whether we’re due for a tough financial imbroglio, or something more serious akin to the Great Depression.
MainStreet consulted Warren Brussee, author of The Great Depression of Debt and Gerald Hanwick, professor of finance at the School of Management at George Mason University, to weigh in on America’s economic fate.
The potential for another Great Depression:
“A depression is just a severe and long recession, and that has already started. People should look at consumer debt, which is at historical highs, and our economy that has been carried by this debt, and question how, without a serious slowdown of the economy, this debt can be paid back. Even consumers adjusting their lifestyle to their income, which is inevitable since all their credit is used up, will slow the economy dramatically.” - Warren Brussee
“One of the factors that was instrumental in the Great Depression is that there was a housing collapse but that was due to the fact that people were unemployed. Today the indicator a lot of people look to is what is happening to employment. We're not seeing good things but were also not seeing a huge ramp up in unemployed workers. We're not seeing a huge collapse in the demand for employment. As an indicator, that's what I would look at.” - Gerald Hanwick
Similarities between the current situation and that of the 1920s:
“In the first depression, stocks were heavily speculated and leveraged; this time it is housing. And the breaking of the housing bubble with its risky mortgages is affecting many banks and people. Currently over 10 million people owe more on their houses than what they are worth, and this number increases daily as home values drop. Foreclosures have already exceeded historical levels.” -Brussee
“One thing that’s happening today that also occurred after the  crash is that we have fundamentally a deflation in the value of debt. Mortgages are falling as are other type of derivatives, but it's linked to one thing: the collapse in the housing prices of residential real estate…There are similarities in that there is a lot of debt deflation, but the dissimilarity is that its because of the one asset—the overall economy seems to be moderately growing. That's the big difference.” – Hanwick
In the 1920’s, productivity was rising dramatically while average manufacturing wages were nearly flat. All the profits were going to corporations. Currently, real wages are flat or falling while costs for energy, food, and medical care is soaring. So the situation is even worse now!” –Brussee
“Investment banks traditionally should be able to be rolled up in almost an instant—we've seen this happen many times before. From the commercial banking side, this is much more like the Savings and Loan crisis than it is the Depression, and we know how we handled that.” –Hanwick