Recession or Depression?

October 29, 2008

This was a common sight during the Great Depression of the 1930s.

Public domain photograph pulled from Franklin D. Roosevelt Library and Museum

This is a common sight in Syracuse today.

Today is the 79th anniversary of Black Tuesday, a day on which the stock market experienced a devastating crash, ushering in the Great Depression. LeMoyne College Economics Professor Wayne Grove said the United States is currently experiencing a recession, but warns that this recession can spiral out of control and become a depression.

Grove said the difference between a depression and recession is that a depression is a recession that becomes very severe or lasts for a long time.

Grove said the current economic crisis is driven by financial uncertainty associated with the failing housing market. Grove explained that money flowing into the country from foreign middle classes, as well as an intentional federal effort, drove down interest rates in recent years.

"Those interest rates were so low," Grove said," it made it really inexpensive to borrow. That encouraged a lot of people to borrow, and encouraged excessive borrowing, and helped fuel the rise in housing prices."

Grove further explained that the ease with which people were borrowing money meant that credit standards were lowered.

"As a consequence, you end up with people who are able to buy homes in which the mortgage payments they've got to make are really out of line with their earnings potential," Grove said. "Particularly the people who didn't have the kind of job security that would guarantee that for 30 years they would have the income earning ability that in good times they were able to have."

Grove said the current unemployment rate, 6.1 %, is high, but not excessively so. Instead, he asserts that many more people are under-employed (are part-time when they want to be full-time). He said under-employment rates are a stronger measure of the health of the economy.

Grove said the current recession can be resolved in two ways. First, he says, the housing market needs to bottom out and reach some realistic values.

"Once those are appropriate," he said," then a lot of the financial instruments associated with housing which are causing the collateral problems will sort themselves out, and the banking market can settle."

The second way to resolve the recession is to increase government spending, Grove said. New York State has balanced-budget requirements--it may not spend more money than it takes in. Grove said, however, the balanced-budget requirements contribute to the downward spiral of the economy.

"When you cut spending, as Governor Paterson is now doing--he's not a bad guy, but it's the state budget requirements of having balanced budgets--it's the cutting of jobs, which reduces people's incomes, which reduces people in the State of New York's abilities to buy goods and services, which exacerbates the recession.