It may be bad, but it's not a depression

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Americans binge on credit in a mania of speculation and consumption until the debt-fueled bubble bursts. Wall Street has a meltdown, the mania turns to hysteria, and the economy goes haywire. That scenario spawned the Great Depression -- and it's painfully clear that similar factors are in play today. Now the question on everyone's mind is: Will it happen again? From late-night comics to financial pundits, there are plenty of people predicting a new era of breadlines and Hoovervilles. In fact, according to a poll this month, about 60 percent of Americans think we could suffer another depression soon.The calamitous events of recent weeks -- a deepening credit crunch, bank failures and hasty mergers, financial titans crumbling, the stock market tumbling, the government stumbling for solutions -- evoke an alarming sense of deja vu. But at the same time, most people's day-to-day reality is nothing like that during the Great Depression, when millions of families were thrust into poverty. Despite screaming headlines about financial chaos, "for the average person, it hasn't had an impact," said Gregg Easterbrook, a Brookings Institution fellow in government and economic studies. "Goods and services are plentiful; the price of gas is falling; ATMs are working. People are not losing jobs left and right."The current situation is a financial panic, not an economic collapse, Easterbrook said.There is no doubt that damage to the financial sector has been profound, with the demise of major Wall Street institutions and plunges in the stock market. But that has not hurt Main Street to the extent it did in the Great Depression."The mess in the financial system is probably a lot worse than it was in the 1930s," said Gary Richardson, a research fellow at the National Bureau of Economic Research. "But the problems in the financial system have not been transmitted to the rest of the economy to anywhere near the same extent. That's the comforting thing that the public should take out of this."Economists can readily tick off numerous parallels between today's economic climate and that of the late 1920s. But many of them immediately bring up important ways in which this time is different. Here is a rundown of some key distinctions:Unemployment: Joblessness hit a five-year high in September -- but that high is 6.1 percent, drastically different than the 24.9 percent peak reached in 1933. And many of today's jobless workers can collect unemployment insurance, a federal program that grew out of the 1930s experience. Banks: Federal deposit insurance -- another legacy of the New Deal -- has made all the difference in the world to the banking sector. Fifteen banks have failed this year, some of them triggering bank runs reminiscent of the Great Depression. But deposits at all those banks were insured up to $100,000 (recently raised to $250,000). When banks went under in the 1930s -- and about 10,000 out of 25,000 banks went belly-up during the Depression -- people lost every penny.The bank failures and bank panics in the early 1930s had grave consequences for the overall economy. Bank lending virtually stopped, paralyzing business expansion. The nation's money supply fell 33 percent from 1929 to 1933 as consumers hoarded cash and banks increased their reserves to guard against runs. That in turn led to rampant deflation, with aggregate prices falling 22 percent from 1929 through 1933.Housing: America had a housing boom in the 1920s, fed by lax lending standards, an increase in loan-to-value ratios and more use of high-interest secondary loans, according to a report by David Wheelock, vice president and economist at the Federal Reserve Bank of St. Louis.Real estate speculation was widespread. Most home loans were balloon notes of five years or less; borrowers would refinance them at maturity, but when housing prices started to fall, refinancing became impossible and they ended up losing their homes. By contrast, today's foreclosure problem has been largely confined to subprime mortgages, which represent 14 percent of all outstanding first mortgages. While foreclosures have started to spread to "near-prime mortgages," which represent another 8 to 10 percent of the market, that contagion has been relatively minor to date. Also, it's noteworthy that one-third of all homeowners own their residence free and clear. Safety nets: A raft of New Deal programs is already in place to protect consumers and safeguard the system. Deposit insurance, unemployment insurance and Social Security all directly target consumers. Other institutions, like the Securities and Exchange Commission, regulate the stock market to protect investors.All of this is not to say that happy days are here again. Most economists agree that we're already in a recession, one that probably started last December and could last up to another year. But a recession -- two or more quarters of declines in growth -- is a far cry from a depression. While the exact hallmark of a depression isn't clear-cut, it's often defined as an annual drop in gross domestic product of 10 percent or more.By that yardstick, a depression is not in the cards. GDP is expected to be in positive territory this year and next, according to forecasters polled by the National Association for Business Economics, who predict 1.8 percent growth this year and 1.6 percent in 2009.E-mail Carolyn Said at csaid(at)sfchronicle.com. For more stories visit scrippsnews.com