While the Great Depression is considered to have begun with the great stock market crash of 1929, the first mention of the words "great depression" was in a speech given by Herbert Hoover in late 1931. The first specific and titular reference did not occur until 1934, when British economist Lionel Robbins published a book titled "The Great Depression." This would neither be the first nor the last time economists influenced by the Austrian School would be the first to identify a major economic downturn in the making or to point out that the policies of the fiscal and monetary authorities were guaranteed to exacerbate it.
What then, are the prospects of enduring recovery? It is clear that they are not bright. It is quite probable, if there is no immediate outbreak of war on a large scale, that the next few months may see a substantial revival of business. If the exchanges are stabilised and the competition in depreciation ceases, there is a strong probability that the upward movement, which began in the summer of 1932, will continue. If the stabilisation were made permanent and some progress were made with the removal of the grosser obstacles to trade, it is not out of the question that a boom would develop. There are many things which might upset this development. The basis of recovery in the United States is gravely jeopardised by the policy of the Government.
– Lionel Robbins, "The Great Depression," Page 195
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At the end of 2009, conventional economists are claiming that the economic contraction which began in 2008 is over. Most government published statistics show growth and the stock markets have recovered half of their previous losses. While some of the wiser economists are hedging their bets by stating that they expect growth to be "sluggish" with "downside risks," there are no more expectations of market crashes, financial collapse or widespread economic contraction than there were at the beginning of 2008. The question is not one of growth versus contraction, but rather how much the economy will grow. However, the conventional economists are just as wrong to think the contraction is over as they were to believe that it was not on the horizon before.
While the Federal Reserve's statistics show that the debt-deflation process has not yet begun in earnest, the expansion of credit which is necessary to provide what passes for growth in a credit-based economy has ended. Total credit market debt remained essentially flat since the fourth quarter of 2008. Total loans and leases by commercial banks decreased 6.2 percent in 2009, which was six times more than the largest previous decline in 1975. The FDIC seized 140 failed banks in 2009; their $139.3 billion in deposits represented 1.84 percent of all of deposits in the U.S. banking system. As can be seen in the chart below, this was worse than either 1929 or 1930, and 30 percent worse than the 1.4 percent failure rate I projected in my book "The Return of the Great Depression."
While it is not possible to predict precisely how many banks will fail in 2010, if we note the recent 1,600 new hires by the FDIC in conjunction with Calculated Risk's Unofficial Problem Bank List of 545 institutions with aggregate assets of $295.6 billion, we can make a rough estimate. In December 2008, there were only 204 banks on the list, so a similar Problem Bank/Failed Bank ratio would lead one to expect 374 FDIC bank seizures in 2010. This correlates well with the rumors of an expected 400 bank failures in 2010. Since the average bank that failed in 2009 had $1,229 million in assets and $983 million in deposits, we can calculate that 2010 will see failed bank deposits rise to more than 5 percent in 2010.
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Since it is obvious that banks seized by the FDIC do not make new loans, we can expect the pace of credit contraction to increase in keeping with the number of failed banks. If failed deposits of 1.84 percent correspond with a 6.2 percent decline in commercial bank loans, then a 5 percent rate would tend to indicate a 16.8 percent reduction. This level of credit contraction would be completely unprecedented in the post-war period; one presumes it would also be catastrophic in terms of its consequences for the national economy. Moreover, it would not be something that the inevitable third or fourth stimulus plans are capable of curing, especially since the first two stimulus packages have done nothing more than partially prevent the public from realizing the true extent of the problem.
Lionel Robbins's fateful words, written in the summer of 1934, are as valid today as they were in the middle of America's Great Depression. Unfortunately, they demonstrate how tragically little has been learned in the intervening 75 years by our economists, politicians and monetary authorities.
It is true that there are some signs of recognition of the mistakes which have been made in the sphere of monetary policy. But as yet there seems little will to repair them, still less to face the wider economic consequences which such repair would involve. For the rest, so far from there being any recognition of the instability and confusion which has been caused by the policy of interventionism, the majority of the leaders of public opinion seem to have drawn from the events of the last few years the conclusion that more intervention is necessary.
– Lionel Robbins, "The Great Depression," Page 197