GN Commentary: February 20, 2009 - The Great Depression

As long as we live beyond our means and spend more money than we earn there will always be the potential of another Great Depression.

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Video Transcript

On Tuesday, February 17, our new president Barack Obama signed the 787 billion dollar stimulus bill.  This bill is designed to jump start our economy, but will it really accomplish that goal?

Representative Tom Cole, Republican from Oklahoma had this to say about the stimulus bill:  "Never have so few spent so much so quickly to do so little."

Columnist George Will used a recent column to calculate the real cost of the 787 billion dollar stimulus package.  He suggested that if you add the cost of borrowing this amount of money and allow for the certainty that many temporary programs will become permanent; the real price soars to more than 2 trillion dollars.  A few months ago we couldn't even fathom a billion dollars, now we speak in terms of trillions of dollars.

Some are comparing this to the Great Depression.  The Great Depression lasted for most of a decade, beginning with the stock market crash of 1929 and lasting until the onset of WWII.  In the United States, the gross national product declined from the 1929 figure of $104 billion to $56 billion in 1933.  The unemployment rate reached a high of 24.9 percent in 1933.  Currently our unemployment is 7.6%.  And if you took into account the higher population and workforce today, this would be comparable to 24.5 million Americans losing their jobs, four times the current number.

Stocks fell 90% and 1/3 of all banks failed.  Anyone looking at the facts would conclude that we are nowhere near another Great Depression, but there are frightening similarities between 1929 and 2009.

Many may not be aware but it was the cheap credit in the 1920s that led to a housing boom, fueled by five-year, balloon-payment mortgages. When the mortgages came due, the homeowners had the choice of paying the balance, refinancing, selling the property or going into default—similar to the choices facing adjustable-rate mortgage holders today.

By 1929, homeowners could not keep up with their payments. Months before the stock market crashed, home-sale ads were full of phrases such as "price slashed," "must sacrifice all," "big reduction" and "must sell immediately."

Lawrence Mishel, who heads the Economic Policy Institute, said that such overreliance on credit—similar to the recent reliance on credit cards and home equity loans—could not be sustained over the long run and this led to the Great Depression.

"You can't run an economy without having enough income for workers to spend on consumption," Mishel said. "It's important to grow an economy the old-fashioned way: earning money, and then spending what you've earned."

The same dynamics that led to the Great Depression are all around us.  The question is whether we have learned anything about ourselves in the eight decades since 1929.

The Bible warns us about basing our lives on false principles—the love of money being one of them.  Paul wrote to the evangelist Timothy "the love of money is a root of all kinds of evil…" (1 Timothy 6:10).  How true those words are in describing the events that led up to the Great Depression of 1929 and again the events that led to the faltering economy of 2009.  As long as we live beyond our means and spend more money than we earn there will always be the potential of another Great Depression.

For GN Magazine, I'm Jim Franks.