Comparing Facts About 1929 Great Depression and 2009 Part 1

Rick Santelli’s rant on the floor of the Stock Exchange made me mad. The cultural and media switch from blaming institutions, corporations, regulatory bodies and all manor of greed mutating has now morphed into branding individuals and and families as “losers.” Yes, there is a lot of anger and frustrations. It is easier to be angry than to find answers.

Yet it is not that easy to explain. This is a complicated issue. It is not just the Sub-Prime loan crisis. It is not just the Pyramid investment schemes.  It is not just the price of oil, food or other commodities.  And, most important, it is NOT solely an American problem. This is a global financial disaster. 

What I would like to attempt for my next series of posts is to help you find facts; you can make up your own mind and act accordingly.  This first attempt might seem a little dry but it is important to understand the facts before you can understand what people had to do to survive, then and now.

Question 1 – If this is a depression how is it similar or different from the one in 1929?

The financial crisis has not officially been declared a depression. To me, this recession has many of the features of a depression and apparently so does Fox Business News. There are many complex reasons why the 1929 Great Depression happened. These are the some of short answers:

• There was an agriculture/environmental problem called “The Dust Bowl” that removed viable top soil from farm land. This affected farmers ability to grow crops and to repay the loans. The banks foreclosed on the farms, sold to the highest bidder and evicted the families.
• This was the age of industrialization. Workers put in long hours for little pay. Businesses not only produced but over-produced commodities. There wasn’t enough customers to buy the products. Yet manufactures kept producing. You also had overseas competition as well.
• There was limited or no regulation regarding the practices of the Stock Market. It was the good old boy club and any money obtained was great for the club members who had no regard whatsoever for their actions, either legal or unethical.

Question 2 – What are the similarities?

1929 – Investors were able to purchase stock on a “margin.” This meant that a person could buy 10% of the value of the stock and owe the rest payable at a later time. Some folks borrowed from the bank to make stock investments. Others took their savings from the bank to purchase stocks. Most Americans had their money in the bank, the same as now.

Now many of the stocks were tied to legitimate companies. Others had purchased a certificate of stock ownership tied to a company no one knew anything about, especially those that were selling it. Millions of shares were being bought and sold for 10% of the value. Then came the day when the banks and financial institutions called in the margin. When they did that the investors around the world panicked.  Everyone was trying to sell. No one was buying. The market crashed.

Those that were smart and just had their money in the bank? If the bank did not have the funds to return your deposits you lost them.  Your money was gone. There were 4,000 bank and financial institutions that disappeared. This is why some of the great-grandparents are or were extremely fearful of putting money in the bank.

2009 – There were individuals buying and selling mortgages then repackaging the loans and selling them to the next sucker, I mean buyer. In the meantime,  institutional investors such as teacher unions, state retirement boards and other companies were buying money market and other types of fund investments to help grow their retirement funds for workers.  Some of the bad loans were interwoven into those packages. 

Let’s not forget about how easy it was for people to get credit and adjustable rate mortgages. Or that the housing market also inflated home prices. New construction was booming as was the companies that serviced the construction market. Now mix in the marketing campaign to people with less than stellar credit and charging higher interest rates for that population to purchase a home without documentation of income or ability to pay. Common sense did not matter to the borrower or lender. Get the loan, sell the mortgage. There were warnings that were ignored on the local, state and federal level.

Like 1929, at some point the call for the full value of the loans was requested. There was not and is not enough money to pay for the houses, the loans or to compensate investors. Enter that magic word “panic” followed by fear, rumors and business collapse.  Sound familiar?

Question 3 – What are the differences?

• The Securities and Exchange Commission is charged with keeping an eye on the Stock Exchange and financial institution. In the past eight years attention has been lax and the office was understaffed. Hopefully that will change in the future.
• Each bank in the country is now required to have Federal Deposits Insurance for each account up to $100,000. That has been temporarily raised to $250,000 until December 31, 2009. So, theoretically, if your bank goes belly up you would not lose any money by being a depositor. The Federal Deposit Insurance Corporation has an information page on exactly what happens when a bank fails. I should tell you that a number of banks have failed and there will be others. Be prepared, check out credit unions as a back-up financial storage space.
• There are a number of federal agencies that help with agricultural concerns. There is a different problem. Many of the small famers were driving out of business by competition with large agribusiness. Their interests are not the same as the one or two family farms. Many of them received subsidies that were intended for other kinds of farmers. That really needs to be looked.
• The government has stepped in and given the banks money to prevent the larger ones from failing. It also gave the money to release into the general population so that small businesses, vendors and employers can conduct their normal business activities. The banks haven’t shaken loose a dime.

There are reliable sources that can explain more in plain English. If you don’t like the ones cited or linked to drop hints in the comments. I don’t have instant answers that sound good in a sound bit. I am not a financier or historian. What I can locate sources that give a better picture of our past and current situation. I think that we can find our way out of this mess if we learn to work together across party lines and be willing to educate each other without hostility.  Leave that to Rick.

Next time, a look at the women and men who endured the Great Depression and their great-grandchildren in 2009 coping skills.

More Resources

Chitra at Poor Kid's School of Finance has her explanation of the mortgage meltdown. If you are 20-something you are gonna want to watch this. If you are older you are gonna need to watch this to explain to your teenagers. John Bird and John Fortune are a comedy duo in the United Kingdom. This is a comedy routine. It is also one of the best plain English explanations of the Sub-Prime lending fiasco.

For more information about the The Dust Bowl you can visit Living History Farm.org  There are oral histories in QuickTime format that give you a sense of the power of the event. The PBS website The American Experience has a section called “Surviving The Dust Bowl” and there is a timeline that shows how the events intersected with the 1929 Depression and how long it took for areas of the United States to be restored. Nan Patience has a nice 2008 retrospective with photos about the 1929 Great Depression.

This American Life did an excellent job of explaining the Sub-Prime mortgage crisis and have just created a new version to help you understand why the banks won’t let go of the money that the U.S. government has given them.  I strongly urge you to listen to the banking  explanation because I don’t want you to stand in line trying to get some of your money out of a particular bank.  You should also hang out at the NPR Planet Money blog

This post was originally written for BlogHer where I am a Contributing Editor.