The Great Depression 2.0?

Update: Asia opens down.

By Dan McDermott
Warren County Report Newspaper

The large red headline on Matt Drudge’s Drudge Report said it all: “WOW!!”

The Dow Jones Industrial Average had risen 936 points.

But while Wall Street has an orgasm following yesterday’s record comeback, I thought I would pause to take a look at history.

As I mentioned in a previous post, if you look at the historical trend, the Dow Jones Industrial Average had a pretty steady rate of growth following World War II until about 1984. Then it got pretty crazy, or “irrationally exuberant ,” as former Federal Reserve Chairman Alan Greenspan put it.

If you follow the line above from 1950 to 1984, the Dow should be at most around 3,000 today.

So what happened?

There were many factors which far more learned scholars than I could better explain. But I think a combination of loose regulations, a want-it-now mentality, and the Internet were a large part of the rise.

Loose regulations allowed lenders to loan people homes they could not afford.

I remember talking a couple of years ago to a mortgage broker on my radio show who was advocating stated-income and interest-only loans.

I asked her what would happen if the value of a home went down and an interest-only loan recipient had to sell? She scoffed at the notion. Housing had been going up forever! Was I crazy?

And a stated-income loan which provides hundreds of thousands of dollars to someone with shaky credit on a signature is a liar’s dream come true.

Unfortunately, as the introductory teaser rates made way for balloons or sharp increases, that dream often turned into a nightmare for the homeowner–but not for the mortgage broker who was long gone with her commission.

Part of the blame goes to people who barely earn enough to rent but allowed themselves to become intoxicated about the thought of owning a home and either didn’t read the fine print on the contracts or fooled themselves into thinking they could handle it later on.

Or lied.

Just hand me the keys. I want it now!

But more of the blame goes to the government officials and financial executives who allowed it or encouraged it to happen.

I also think the Internet is a major cause of the huge increase in the stock market.

The Internet is the biggest invention humans have ever created. It has virtually eliminated all borders among countries who choose to participate.

One of the biggest effects is the creation of thousands of technical and other well-paying jobs in India, China and other countries. This led to increased revenue and a higher standard of living in these previously impoverished developing nations.

They are even collecting our debt.

So now, as another guest on my radio show noted in 2006, China and India use more energy than the entire world did ten years earlier.

And a lot of the money generated was made available to Wall Street and in turn to fund these creative mortgages.

As money became plentiful and easy, the prices of homes rose to levels that were absurd and unsustainable.

It was a big Ponzi scheme that has now begun to unravel.

We may or may not technically be in a recession, usually defined as two quarters of negative growth.

But we are most definitely in a housing and a disposable income depression.

No one is buying a home. No one is eating out or going to the movies.

Drive around town and notice all the banners, signs and other sign-ordinances-be-damned methods being tried by desperate businesses large and small to try an attract someone–anyone with a spare dollar to spend in a store or restaurant.

And if you wander into a bar, the drink you buy may be served to you by the person who listed your house a few years ago.

These conditions didn’t change yesterday with the rebound on Wall Street.

And the Main Street businesses and their struggling employees and broke former customers surely noticed when the government didn’t get around to acting until the Wall Street tycoons started to feel the same pain much of the rest of America has been feeling for more than a year.

So what is next?

Look at the chart.

And get ready to weather this storm for a long time.



  1. In large part, I agree with you wholeheartedly.

    However, the big thing you’re not taking “stock” of is that the 80’s was the first decade to really feel the meteoric rise in globalization. Companies not only started selling more abroad, but the started realizing economies of scale and scope, as well as the multinational’s ability to economize through outsourcing.

    Of course, the Internet blew things up even more as the market’s user base grew enormously. Back in the 70’s, playing the market was a rich man’s game. Today high school kids have Ameritrade accounts.

    Again, I agree with you (and Alan Greenspan) that irrational exuberance certainly did dominate the 90’s–he made his speech in 96 by the way. But much of the markets gains were warranted by global market growth. That said, I would consider a 3000 Dow irrational apathy. But I do see your point.


  2. Barry,

    You make some excellent points.

    Globalization obviously was a huge factor and I think the Internet created a lot of that–except during the 80’s of course since it hadn’t yet taken off.

    I’m not saying that the Dow is going to drop to 3,000 but I do see a major correction in that direction. If the Fed props up artificially high housing prices it will prolong the agony.

    I do wish I had bought and sold some stock yesterday!

  3. I really have no idea where the DJIA should be. It might be most reasonably at three hundred, three thousand or thirty thousand. It is a gamblers dream. P/E ratios do not support the prices of most stocks. “Value” in stock terminology is forward-looking, with most stocks you don’t purchase value, you purchase where the value is going to be in a few years with a hope of getting a return when you choose to sell it later on to someone else who is looking at a future investment at that point. The earnings viewpoint aside, stocks are also not priced based upon current value. There are many stocks that are selling for multiples of their asset value and others that are a lot less than their asset value. The first subset is pretty easy to find, most companies are valued based upon a future hope of profit and growth.The first stock that comes to mind in the second subset is Pep Boys stock. Their real estate holdings alone are worth 400% of their market capitalization. The DJIA is a perception based market. Debating where the DJIA should be seems akin to two bookies debating the point spread of an upcoming game; educational and entertaining, but in the end a moot point. However, where the market should be depends upon what you think a reasonable growth rate is for the value of the stocks. I looked back to 1918 and the DJIA vacillated around 70 points at the time. Extrapolating a 4% growth rate would put it at 2,388 today, but that number skyrockets if you believe that a 7% growth rate is more reasonable(which would put it at 30,877 today)or, as is commonly thrown about, a 12% growth rate (would put it at 1,882,435 today) on the DJIA

    The current state of the Real Estate market is horrendous, as you pointed out. One has nothing to do with the other. It is my contention that they (the real estate market and stock market) have common factors. They are related but one has no impact (directly anyway) on the other.

    The common factor in our current financial concerns is the credit rate, specifically the federal funds rate. When the fed drops the rate and makes credit artificially cheap (below the current true market cost) then it spurs spending. Of course that spending is credit spending, not capital spending. It emboldens people to extend themselves beyond what would otherwise be a comfortable level if they had to pay true market interest rates. The fed dropped their rate to 1% for a period of time to spur the economy. They succeeded. The economy grew. People and companies spent credit money like drunken sailors. That growth, in that fashion, comes with a certain cost. You have an aftermath much like we have today. Congress just decided to spend 700 Billion dollars of the taxpayers money (they said that was the most they think they will need…but mark my words, it will be at least 4 times that amount to do what they want, which they shouldn’t be doing anyway, but that’s a different rant)

    The government does not have the ability to control the economy, They can push on it here and there and they can affect the economy, but they cannot actually control it. Every time they try to affect it, they end of with unintended consequences. The consequences of their current meddling will be just as disastrous as every other time, actually, this time, I think more so. I don’t see nationalization as being too far away. The people seem to believe that the government must “do something” but that is exactly what got them in this situation to begin with. The government is going to try to douse this credit crisis fire by throwing gasoline at it. The trillions that they are going to spend is either going to be collected by taxes, or tacked onto the deficit. Either way, it will do far more damage than the good they hope for.

    By the way, there are other choices than to vote for Obama or McCain for president. It seems like a choice of execution styles. Either I can have a bullet put into my head by McCain and his militaristic/socialist beliefs (that he must, can and has the moral authority to attempt to control the world) or I can have Obama slit my throat and die a slow death of financial ruin by his socialist/Marxist plans for the United States.

    It seems that neither one of them has taken the time and effort to read the Constitution. Either that, or they don’t believe in it. The Constitution does not limit the rights of the people, it limits the authority of the government.

    Respectfully yours,


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