Are We Headed Toward Another Great Depression?

With the domestic and world markets struggling, and with new bad news on the economy arriving by the day, it's no wonder that 60% of Americans believe a depression is "likely."

We put that question to a panel of Fool analysts: Are we headed toward another Great Depression? Here's what they had to say.

Robert Brokamp: No one can say for sure, but there are several reasons to think not. There are more safeguards in place, such as FDIC and SIPC insurance, than were around in the 1920s and 1930s. Plus, the stock market is less vulnerable to fraud and manipulation (one of the contributors to the Great Depression), thanks to the Securities Acts of 1933, 1934, and 1940. Government plays a much bigger role in the economy, which has its drawbacks, but in times such as these, it can be a stabilizing force.

Bill Barker: No.

Absolutely not.

But I get to define "Great Depression" my own way, right? Because it can mean a lot of things to a lot of people.

As bizarrely unregulated as the credit default swaps that are important to all this are, we have a much better-regulated market today than we had then. Despite the current tumult, the lessons learned then (and by Japan's 15-year-long recession) have been applied to today's circumstances and will help us. The economy won't grow the rest of this year, and next year isn't going to be pretty, either, but I'd certainly be a believer in our economy 18 months from now. That won't be a fun 18 months, but that's a lot different from a Depression, great or otherwise.

(If you need to understand credit default swaps, listen to This American Life's "Another Frightening Hour About the Economy" -- that and TAL's "The Global Pool of Money" should be required listening for all Americans these days.)

James Early: Nobody knows for sure, but we've got a much more robust financial system in place today, so I'd say it's unlikely. We were over-levered before and living high off the hog, so we needed a good, clear wake-up call. But I'm hopeful that we've got enough real value in the economy, and that developing countries' thirst for modernization will pull the world through.

Tim Hanson: No, but this won't feel good for a while, given the credit crisis. The good news is that there is a lot of cash waiting on the sidelines right now for the all-clear. In other words, unlike in the Depression, capital is out there to spur growth.

Andy Cross: I hope not, and I'm guessing not. That's not to diminish the seriousness of the financial mess we put ourselves in (and each of us, in some way, is to blame partly for this crisis), but the biggest difference is that the central banks and governments around the world are much more willing to step in to help out than they were in the 1930s. The problem is that there is zero confidence in the banking system, which means there is zero credit flowing through the economy, and confidence and credit are the oil of the financial engine. My guess is that we'll see some other banks fail and a higher unemployment rate over the next few months, but it's just so difficult to tell when it will bottom and turn around. And if investors stay on the sidelines to jump back in at the bottom, chances are very good that they will miss it.

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Comments from our Foolish Readers

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  • Report this Comment On October 16, 2008, at 2:08 AM, The1MAGE wrote:

    I am hearing people talk of a depression. Yet I remember people talking of depression after the 87 crash.

    There were many factors, for example the lack of an FDIC to reduce the chances and effect of the runs on banks, and the ability of banks to call mortgages due at any time.

    And everyone forgets the effects of the dust bowl at that time.

    But anything is possible. But why waste time worrying about it until it happens? If it never does occur, you have just wasted time, effort, and emotional energy.

  • Report this Comment On October 16, 2008, at 2:10 AM, The1MAGE wrote:

    I am hearing people talk of a depression. Yet I remember people talking of depression after the 87 crash.

    There were many factors for the Great Depression, for example the lack of an FDIC to reduce the chances and effect of the runs on banks, and the ability of banks to call mortgages due at any time.

    And everyone forgets the effects of the dust bowl at that time.

    But anything is possible. But why waste time worrying about it until it happens? If it never does occur, you have just wasted time, effort, and emotional energy.

  • Report this Comment On October 27, 2008, at 2:42 AM, ImADancinFool wrote:

    "There are more safeguards in place, such as FDIC and SIPC insurance, than were around in the 1920s and 1930s. Plus, the stock market is less vulnerable to fraud and manipulation (one of the contributors to the Great Depression), thanks to the Securities Acts of 1933, 1934, and 1940."

    H-E-L-L-O... And why do we have the "Mortgage Crises" (amongst other things) we're in now?? These "Acts" did what for us? It just took 75+/- years for the CEOs, CFOs, etc. to get together on how to BEAT said Securities Acts! It is still all about greed no matter how you slice it. IMHO...

    My mom (Meryl Lynch, 1960s) used to half jokingly quote someone who said "The difference between a Recession and a Depression is it's called a Recession when your neighbor's out of work and a DEPRESSION when YOU are (too)".

  • Report this Comment On October 31, 2008, at 2:55 PM, depressiongrade wrote:

    Why you have all the naysayer here? All the reasons given here are superficial. No one looks at the fundamental causes such as debt levels and compares that with the debt levels in late 1920s... There are many people believing that we are heading into a greater depression. We need someone with a different view to explain why?

  • Report this Comment On November 01, 2008, at 8:06 PM, AustinAndy wrote:

    If the Democrats proceed to pass the measures which they have said they supported during this election, then the possibility of a depression remains. Four things not to do during a severe recession: 1. Do not raise taxes. 2. Do not spend government money lavishly. 3. Do not have the government run everything in the economy. 4. Do not diminish or limit foreign trade. I will add a fifth item to the above list: 5. Do not prevent access to energy of any type. Read The Forgotten Man and see if the Democrats are repeating the mistakes of the 1930s.

    AustinAndy

  • Report this Comment On January 24, 2009, at 1:52 PM, MikeH123 wrote:

    Republicans are to blame for causing the Great Depression and the current economic collapse by favoring monopolies, big business and the wealthy. These policies squeeze the masses between relatively low wages and high taxes and prices. The Federal Reserve is forced to try to maintain the standard of living by expanding the money supply, which produces unsustainable credit-driven booms. Eventually, consumers’ credit runs out, especially since the debt financing from the savings of the wealthy is at high interest rates. When markets fall, brokerage firms, that lend money on the margins (e.g., several dollars for every dollar an investor deposits), call in loans, which cannot be paid back. Banks fail as debtors default on debt.

    Democrats make sure depressions continue until world war. They believe in a nationally planned economy including higher taxes on corporate profits, increased federal government control over the economy and money supply, intervention to control prices and agricultural production, complex social programs and wider acceptance of unions. Interference in the economy help cause depressions, and government efforts to prop up the economy after only makes things worse by delaying the market's adjustment. We need a new political party that favors free markets, small business, the middle class and antitrust.

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