The Great Depression, Part One

Hopefully we won’t experience an event like the Great Depression ever again, but the subject is always appropriate, if for no other reason than to serve as a reminder that we need to be vigilant about economic matters and the excesses that can occur within our system. There are literally tons of books on the subject, as the Great Depression, traumatic event that it was, has been studied by many in the decades since it occurred. Economics is not an easily understood subject, and this blog is NOT the “definitive” history or analysis of the Great Depression. For a good overview of the Great Depression, I highly recommend Robert S. McElvaine’s “The Great Depression, America, 1929-1941.” His book doesn't use a lot of the economic jargon and all of the technical talk that few of us understand. It is more of a history, than an economics book, but with easily understood economic information. I also highly recommend the chapters on Herbert Hoover and Franklin Roosevelt in “The American Political Tradition,” by Richard Hofstadter.

Many years ago, I did a term paper on the Great Depression for an economics’ class in college (ah, that was well after the Great Depression, so no wisecracks). That doesn’t make me an expert, but it was and is a topic that has always held an interest for me; then too, when I was younger, most adults of the time had lived through that era, and the scars were still evident. In those times, you seldom heard the term “The Great Depression” used by average folks; it was simply “The Depression,” and everyone understood exactly what that meant. When the stock market was mentioned, some folks still cringed, even though they never owned a share of stock in their lives, nor even really understood about stocks in general, but the memory of “The Crash” was still vivid in their memories.

The early 1920s saw a sharp economic downturn, brought on by the economic adjustments of post World War One, then known as “The Great War.” (Hey, if you called it World War I back then, that assumed that there would by at least a World War II, if not a whole series of world wars, and The Great War had also been given the “subtitle” of “The War to end wars,” an admirable but naïve notion.) The President of the United States at the time, Warren G. Harding, not known as one of the stellar leaders of our history, took action, although minor action by today’s standards. You must bear in mind that in those times “tampering” directly with the economy by government was a no-no. The Government just didn’t do it, and this was not a Democratic or Republican idea, but just plain old economic orthodoxy. Harding, however, had appointed one of the best known men in the world as his Secretary of Commerce, one Herbert Hoover.

Hoover, born in Iowa, was orphaned at an early age and was then raised by his strict Quaker relatives. He attended Stanford University and became an engineer, not the “choo, choo” kind, but a mining engineer. While at Stanford, Hoover served as class treasurer (I believe that was the position, if I remember right), and this was his only “elective” office, if you can call it an office, that he held until he was elected President of the United States. He supported Teddy Roosevelt’s progressive third party candidacy in the election of 1912. He started out making two dollars a day in mines, as I recall reading, but he later was promoted, and later still owned a mining company himself. Eventually he became worth somewhere in the neighborhood of four million dollars, which would be nice to have even today, but it was a VERY considerable sum in those days, and also a considerable sum for a man only in his thirties to have earned.

He was given a position in Democrat Woodrow Wilson’s Administration, and although he didn’t disclose his political affiliation, most people thought him to be a Democrat. During “The Great War,” even before America became formally involved, Hoover was given a crucial role in providing food and essentials to people, first in Belgium, later elsewhere in Europe. It has been said that Hoover and his workers helped save the lives of millions of people. He became a worldwide hero, even having streets named for him in foreign countries. When Harding was elected president in 1920, he named Hoover to be his Secretary of Commerce. Hoover, a workaholic, made the Commerce Department one of the premier agencies of the Federal Government by gathering business statistics and information to follow economic trends. It is my understanding that many of his innovative ideas continued at the Commerce Department for many decades after he had left the office.

Hoover was working on theories to combat economic downturns and one of his ideas was to provide temporary work, such as public works jobs, to provide employment to those who had lost jobs in the private economy; thus the workers kept much of their purchasing power. When the economy turned down in Harding’s first year as president, Hoover persuaded him to provide public works employment, which he did. The program was VERY modest by any standards we’ve used since those times, but the significant thing was, it was a new idea; even a bold idea. The economy recovered in less than a year, although how much Hoover’s small public works program helped is debatable. Thereafter began what came to be called “The Roaring Twenties.” Many new electrical appliances and devices, as well as Americans’ developing love affair with the automobile, helped send the economy soaring to new heights. The problem was, not everyone shared in the economic boom of those times.

One of the big problems within the American economy during the 1920s was in agriculture. American farmers frequently produced more foodstuffs than was good for their own financial well-being. During and for a while after the War, our farmers planted an abundance of crops, since they were helping to feed many people in Europe. Gradually, as Europe recovered, Europeans needed less and less American farm products, but our farmers kept planting too many crops, and consequently, agriculture prices plunged and remained low throughout the rest of the decade. As is frequently the case, this event didn’t happen in a vacuum, and as America’s farmers struggled to stay afloat, banks, especially those in agricultural areas, found themselves in trouble, too. Keep in mind, during our history, the percentage of Americans engaged in, or in a fairly major way connected to, agriculture has been decreasing, but during the 1920s, the percentage was far, far greater than it is today; thus when farmers sneezed, many others caught cold.

There were literally hundreds of thousands of banks in America during that era. Many were small and served rural areas and small towns. These were NOT the banks we think of today, with a relatively few large bank holding companies controlling so much of the banking industry nationwide. If you remember the banks depicted in many of our Old West movies and television shows, like “Gunsmoke” or “Bonanza,” those banks were more typical of many small communities, and even of the neighborhoods of large communities of those times. With so many farmers in financial trouble, the banks in agricultural areas suffered, too, as farmers were a big part of their business. While many Americans were experiencing the “Roaring Twenties,” thousands of mainly small banks were failing. While most Americans paid little notice to the ongoing failures within the banking system, it was an ominous sign of things to come further down the road.

Over time, some farmers gave up, or lost their farms, and moved into towns and cities, where many took jobs in America’s growing manufacturing sector. While there were still many areas of the country without electricity, radios, washing machines, and refrigerators were some of the new products that captured the attention of so many Americans, and American industry had these products and many others rolling off the assembly lines. The wages of many Americans weren’t all that great, but another marketing technique was quickly catching on; “buy now, pay later,” “by on time,” “put it on tick;” that is, credit. Up until then, credit was NOT a common way to buy things; in fact, it went against the grain in many folks. (Just compare that to today, where the average American owes thousands of dollars in credit, and that doesn’t count mortgages.) With most appliances and automobiles costing more than average people could afford to pay cash for, businesses opened charge accounts to allow the purchase of products with customers making regular payments over a period of time. The desire for many of the new goods of the day overcame the “pay cash” upbringing of many folks, and they opened charge accounts; products flew off of the shelves and out of the showrooms of businesses around the country.

All of this business activity and the accompanying profits had some people looking for a way to cash in on the booming economy. The stock market gradually caught the attention of many, and stocks in all of the major companies took flight to the upside. With many folks raking in good profits on Wall Street, other Americans began to test the waters. What was working for people to buy refrigerators was now used for people to buy stocks, credit; it was called “margin,” or “buying on the margin.” The idea was, if you wanted a thousand dollars worth of stock, you put up one hundred dollars and the balance was “secured” by the value of the stock. As the stock market boomed, no one seemed to consider that stocks would ever go anywhere else, but up in price. More and more Americans joined the frenzy on Wall Street. But what if stocks actually came down in price?

Economic Meltdown?

Economic Meltdown? I hope not!!!

So, the big question is, are we witnessing an economic meltdown in America and perhaps the World. The answer is, no one really knows at this point. The stock markets around the world have been jittery, registering big losses on some days, but also seeming to gain a footing on other days.

One of the interesting things has been the discussion about “sub-prime mortgages.” We’ve been hearing about these mortgages for several months now, almost always with reassurances from the Federal Reserve and economists that the problems with these mortgages were not
“spilling over” into other areas of the economy. Something, I take it, that was not really true. I’m not an economist, but from my limited understanding of the situation, these mortgages were given to many folks who would not normally qualify for a mortgage, and often times with special incentives, like no down payments, or delayed payments. In recent months, a fair number of people with these mortgages have defaulted, causing mortgage lenders major headaches; that is, losses. From what I gather, some mortgage companies have been staggered by the losses. When these losses really started showing up in financial statements, lenders began tightening their requirements. Further, investors who normally buy certain bonds that finance companies and, if I understand it correctly, mortgages, began to stay away from these “investments” in droves. Suddenly we’ve got this “credit crunch.” So, the experts were wrong, as far as we know at this time. The problem DID spill over into other areas of the economy.

As I’m sure you are already aware, the amount of new homes being built has been tumbling for months now. The sale of new homes is also way down; so much so, that I heard on the radio one morning that some home builders are renting out newly built homes to try to have a cash flow. The sale of existing homes is also down considerably.

Okay, so what’s been going on? Well, several years ago, the Federal Reserve began to lower interest rates. Following the 9/11 attacks, they lowered the rates on a regular basis in an attempt to get the economy moving again. Over time, it worked! With the lowest interest rates in decades, people began buying homes and businesses expanded. Further, many folks refinanced their homes to get the lower rate, and many took out cash to do repairs, upgrades, or buy flat screen TVs. The President encouraged Americans to buy homes as part of his pitch for an “ownership society.” If I remember correctly, home ownership reached an all time high, in terms of the percentage of Americans who owned their own home. Of course, the downside of part of this was that lenders got sloppy, and in the competitive environment to sell more homes, along came these sub-prime mortgages in substantial numbers.

I’m sure there are many, many reasons why people have defaulted on these loans. Certainly job losses and wage and benefit reductions, especially in manufacturing jobs, had an effect. You’re making fifty grand in a factory, your job goes overseas, and the next thing you know, you’re making twenty grand. Something has to give. And don’t forget, government figures show that something like two to three million Americans lost health insurance in the last few years. You get sick or injured, and goodbye home. And just the cost of living has been rising and wages have not kept up. Now, I know the regular readers here think I’m pro worker. And I AM! I make no apologies for that, but I also have to admit that certainly, not everyone was responsible enough for home ownership. From what I’ve heard on television, predictions are for seven million Americans to lose their homes over the next couple of years, and that’s on top of those who have already experienced foreclosure. As one television analyst noted, it might be good advice to invest in companies that make tents.

When you listen to the Wall Streeters, it all the fault of the poorer or middle income folks who bought homes that they couldn’t afford. There’s probably some truth to that, but some one had to give those loans to them, and that’s that famous “free market” they tout so much.
Now the coals are burning under THEIR feet, and lo and behold, what do I hear? Calls for regulation! Calls for the Fed (that is, the Federal Reserve) to intervene. Folks, that’s government!!! I thought the free market was just so incredible and fool proof! When average folks ask for government help, we’re called ‘freeloaders.” I wonder what they call it now that they want help? I’ll bet it’s not “freeloading.” Sometimes we all have to bite our lips, swallow hard, and go along with things we don't necessarily agree with. After 9/11, many senators and congress people of both parties didn't like it, but they voted to help out the airlines. Now is also one of times. For the good of the country, let's hope that the Federal Reserve can help alleviate the problems.

The point is, these money grubbers have been so disconnected from everyday people. It is just money, money, money!!! They NEVER stop! They never have enough! Tremendous income gains for the wealthiest Americans for years now. Stagnant wages for many of America’s workers. Some of us may lose our homes, too, but at least we get to see some of these birds squirm and twitch and find out how it feels to be a “freeloader.”

Barry Goldwater & His Philosophy

I was watching a program on C-Span about Barry Goldwater. For those of you who don't know that name, Barry Goldwater was a long time Republican senator from Arizona, and the Republican nominee for president in 1964. He lost that election to Lyndon Johnson in a landslide. Goldwater was a conservative, but he was kind of a libertarian on some issues. Just for the record, I liked Barry Goldwater, and I'll tell you why. When people asked him a question, he didn't have to stop and think about what his political adviser told him to say, nor did he have to recall what the latest polls showed on the subject at hand. He gave an answer. That answer might not have been politically correct, but he gave an answer from his own beliefs. He was not a phony. His language was a bit "crusty," especially for those times, when the list of "no-no words" was much longer than it is today. And, it should be noted, he didn't always save his criticisms for Democrats, but some Republicans also were the recipients of his sharp barbs. It was Goldwater who led a Republican group to the White House in August of 1974 to tell President Richard Nixon that he had to resign for the good of the country. At some later point, if I remember correctly, Goldwater referred to Nixon as a "lying s-- of a .....!"

Now, if you noticed, I said that I liked Barry Goldwater. I didn't say I agreed with him on many things, but I liked him in the sense that I respected him. I recall reading many years ago, that Goldwater and Hubert Humphrey were great friends. Humphrey was a Democratic senator from Minnesota, who also served as vice president under Lyndon Johnson. He was a liberal, to keep the terms simple. You would have thought that these two men would have been like oil and water with their different political views, but they were friends, and they respected one another. They did battle on the field of politics, but then at day's end, they went to dinner together.

Many years ago, when C-Span had just recently started, there was a political cartoonist on the air one day. I can't recall his name, but he was well known in those times, and I believe he had just retired. He was famous for his satirical cartoons, and for skewering politicians from both political parties. The interviewer commented about such, and then asked him if, in all his years as a political cartoonist, he'd ever known a truthful politician. He answered that he could name
two, Edmund Muskie and Barry Goldwater. If I remember right, he said that while he didn't particularly agree with Goldwater on many things, he had respect for him.

To me, Goldwater was trying to hold onto a world that no longer existed in the aggregate, as it had prior to the Great Depression. He was a bold critic of New Deal programs and of government programs in general. As is sometimes said, everything has a purpose, and we need the Barry Goldwaters of the world, too. Without them, the opposite point of view would run amok. It's all about some kind of balance. So, we have this clash of ideas and philosophies. Neither side ever completely wins in America (or at least hasn't), and even highly popular FDR had his problems when the public felt that he was going too far. The congressional elections of 1938 saw the Republicans come roaring back from the pit of political exile. Part of the reason why was that Roosevelt had made an effort to purge critics from his own party, and even more, he attempted to pack the Supreme Court so that his programs would go unchallenged. Americans saw all of this, and they didn't like it. They liked FDR, but they let him know that enough was enough.

Goldwater was kind of the "John Wayne" of American politics of the 1960s and 1970s, and in fact, Wayne strongly supported Goldwater's presidential bid in 1964. He wanted us to stand on our own, and if we fell down, to get up, dust ourselves off and keep going. That's an admirable philosophy, but people need help at times, and in my opinion, that help can sometimes only come from government at some level, and on that point I have to distance myself from Goldwater. Call me a liberal, or what ever you want to call me; I can take it, I have broad shoulders. In an ideal world, Goldwater would have been right, but we don't live in an ideal world. Reality can be harsh, and often is. Government has a role in trying to help people to get back on their feet and to get them back into the game of life.

So Barry, I salute you for your blunt honesty and integrity, things we sorely miss in our current era. I appreciate your philosophy, even while I don't totally agree with it.

Some June Unemployment Data

The Labor Department's Bureau of Labor Statistics recently reported that, of the nation's largest metropolitan areas, with populations over at least one million, Detroit had the highest unemployment rate in June (8.1%), followed by Cleveland (6.3%). Keep in mind, the nation's overall unemployment rate has averaged 4.6% for 2007, so these areas are well above the national average. Of course, these stats are all well and good, but what they don't show us is how many people have had to take jobs at lower pay and, or, lower benefits.

Of all the metro areas of the country, 208 showed rates below the national average, but 152 had unemployment rates above the national average. There were 9 areas with the same unemployment rate as the national average.

On Friday, August 3rd, with the stock market shaky, one analyst on CNBC who follows energy futures (I don't recall which brokerage firm he represents) said that we all should be rejoicing at the fact that oil reached a new record high per barrel this week, since that shows how strong the economy is. (It should be noted that oil prices dropped after reaching that new record high, including on Friday.) So why aren't there people dancing in the streets? Well, the only ones who can afford to celebrate about the high oil prices are the multi-millionaires and billionaires, since they make even mo' money, mo' money, mo' money off the high prices, and they can afford to fill their vehicles, no matter the cost.

Then Larry Kudlow, a CNBC anchor, came on and told us just how well off American workers really are. He said that inflation is running at a 2.3% annual rate and workers' incomes are running at a 3.9% annual increase. Well now! We can all sleep better tonight knowing that info!
The problem is, the inflation info doesn't tell us how much more we're paying for the items we need to survive on. I don't know about you, but I see food prices escalating. With high gas prices, companies are starting to pass along the higher costs of transporting just about everything. So Larry, how about coming down to Mother Earth and living with the rest of us for awhile. I'll bet that super pro-business, dog-eat-dog, anything goes for Capitalism stance changes quickly then.

By the way folks, I'm almost positive that Larry Kudlow has a shrine to a "golden calf" somewhere in his house, or office, or maybe both. Further, around that shrine, I'm sure he has pictures of history's most famous, ruthless exploiters.