Is Recession of 2008/2009 like the Great Depression?

At first blush, you might say ‘yes,’ the recession of 2008/2009 is like the Great Depression. Clearly, many of the headlines are touting this recession will be as bad as the Great Depression. While some of you experienced firsthand or grew up during the Great Depression years, most of us have only read about it in our history books. Here are some facts you may not have known.

The Great Depression lasted 43 months, beginning August of 1929 and ending March of 1933. During the Depression, many banks failed, hundreds of thousands were unemployed, and the stock market “crashed”. However, during this horrible time period, there were a number of things missing that we now have in place. At the time of the Depression, FDIC insurance did not exist. Thus, bank failures had greater significance to the general public during the early 1930’s than it does now. Social Security did not exist either, so the retired were not receiving a regular retirement check from the Government. There was no Federal Unemployment insurance program and the Securities and Exchange Commission (SEC) did not exist. These were all created later in the 1930’s.

In the early years of the Great Depression, the Federal Government actually did very little to bring an end to the Depression. The Reconstruction Finance Corporation was not created until 1932, several years after the start of the Depression. Current headlines also include a few other statistics. While the impact of the 2008 recession is reaching millions, it is not in my opinion comparable to the Great Depression where the unemployment rate rose from 3 percent to just below 25 percent. Our current unemployment rate is 7.6 percent. The default rate on home mortgages during the 1930s reached a staggering 50 percent. Late last year, less than 7 percent of the mortgages were delinquent and less than 3 percent were in foreclosure proceedings.

It is clear the impact of this recession is touching millions of U.S. citizens and our daily life is not without worry and concern. But, as of today it is not as damaging as the Great Depression. Sure, the dollars required to reverse our economy’s direction are huge, but so is our economy as compared to the size it was in 1929. Likewise, the number of unemployed may rival the numbers from the 1930s, but remember the size of the workforce has grown significantly since the Great Depression. Using percentages instead of the actual numbers quoted by the media to compare one recession with the other will provide a more realistic comparison and valuable information.

More bad news to come

During recessions, it seems like the bad news never ends. This will be true for this recession as well as for those selling headlines to use what they can to promote their story. But most importantly, much of the news is historical and thus will always lag behind the real economic data. It can take several months to collect, analyze, and then release data to the public. When this occurs, it is possible the data is old data and does not reflect current economic direction. There are many indicators used by economists and financial professionals. Some of these statistics are leading indicators, while others are lagging indicators. Unemployment rate is an excellent example of a lagging indicator. The rate does not begin to rise until layoffs have already started; and generally, layoffs do not start until a reduction in sales has already occurred. This is why this unemployment statistic generally peaks after the end of a recession.

It is important to keep your focus on the long-term objective, and for your current income needs to be met with fixed income sources or from the cash portion of your investments. It is not uncommon for the general public to finally throw in the towel just before the market starts the long-expected recovery. Be smart in managing your investments, and do not become one of those who sell at the bottom and buy back in near the top. This is the old adage and mistake of buying high and selling low. Times as these test our fortitude.

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