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Going Long

It's Not a Depression

We are better off today as we confront the current credit crisis.

The stunning collapse of global stock prices and the downfall of major banking institutions have led most Americans, according to a recent CNN poll, to believe we are heading for another Great Depression. But if we step back and look at the hard economic facts, we can see not only that we are far better off than we were in the 1930s, but also that we are better off than we were in the 1970s -- which, unlike the Depression, is within the memory of many Americans.

The '70s were a frightful decade. Not only did stock prices drop nearly 50% during the 1973Ð74 bear market, but inflation and unemployment were much higher than today. The 1973 oil crisis drove inflation from 3.6% to over 12%, and unemployment soared from under 5% to a postwar record of 9%. In real terms, the prices of oil and gasoline were higher then than they are today, and because of government price controls, drivers had to wait for hours at gas stations to fill their tanks. After a brief recovery in the mid 1970s, the economy got even worse. Oil prices surged again, and inflation soared to nearly 15% in the early '80s, while the jobless rate hit a post-Depression high of 10.8% in 1982.

Borrowing blues. Credit was also hard to get in the '70s, but unlike today, you had to pay astronomical prices to land a loan. The yield on ten-year Treasury bonds went from 6% to an unheard-of 16% during the decade, and the prime rate reached 21% in the early 1980s. Qualifying for a mortgage was almost impossible. Home buyers considered themselves lucky when builders offered them subsidized loans at 12%.

On all fronts, we are immeasurably better off today as we confront the current credit crisis. The inflation rate, which reached a year-over-year peak of 5.6% earlier this year, will almost certainly abate. Since July, the price of oil has fallen nearly 50%, and other commodity prices have fallen almost 40%. Gasoline prices have declined nearly a dollar a gallon since July and are likely to fall much more. Discounts are appearing everywhere as retailers get ready for what they fear will be a tough holiday season.


Because we import most of our oil, the fall in its price is a great benefit to Americans. I calculated that oil at $130 a barrel would shave two percentage points off growth in the U.S. gross domestic product. Oil's fall below $90 will cushion any economic decline.

Today's crisis. I do not want to minimize the severity of what is happening. Excessive lending during the housing bubble has led our financial institutions into the most serious situation since the Great Depression.

But there is another crucial difference between then and now: In the 1930s, there was no deposit insurance. When problems with the banks surfaced and depositors rushed to withdraw their funds, the federal government stood idly by as thousands of financial institutions closed and millions of depositors lost their life savings.

Circumstances today are completely different. The government has basically guaranteed the value of all deposits -- even those above the newly established $250,000 limit. In September, the Treasury Department put in place a plan that insures the value of many money-market mutual funds. Virtually no depositors will lose their savings, and none of the large commercial banks will fail.


These measures will limit the severity of any downturn. A recession is inevitable, but the safeguards put in place for banks will insulate us from a repeat of the 1930s. And the current downturn will not result in the double-digit inflation, unemployment and interest-rate levels that crippled the nation in the 1970s and early '80s. As bad as things seem now, we have been through much worse, yet our economy not only survived but prospered. There is no question it will do so again.

Columnist Jeremy J. Siegel is a professor at the University of Pennsylvania's Wharton School and the author of Stocks for the Long Run and The Future for Investors.