Earlier this week, Zillow was the latest in a growing line of companies to compare the current set of troubled times to the Great Depression. Mind you, the comparison isn’t direct. But it’s close enough. According to Zillow, the comparison is drawn from statistics provided in the book Irrational Exuberance by Robert Shiller, in which home values fell peak to trough 29% from 1929 to 1933. Zillow says the current 17-quarter home value decline of 25% is comparable to the Great Depression. “While not unexpected, the unceasing declines in home values signal that we’re in for a long, bleak winter of continued troubles for the housing market,” said Zillow chief economist Stan Humphries. “The length and depth of the current housing recession is rivaling the Great Depression’s real estate downturn, and, with encouraging signs fading, will easily eclipse it in the coming months.” The comparison, to me, is not a great fit. There is no doubting the acute pain being felt by Americans in the current downturn. But have we reached the point that our agony equals that of Florence Owens Thompson? Some may say yes, but the truth is that Great Depression dogged the U.S. economy until the beginning of the American involvement in the World War II in 1941 — a 12-year span. In a note titled “Theoretically, How Long is This Recovery Supposed to Take Anyway?”, Pedro Amaral, senior research economist for the Federal Reserve Bank of Cleveland runs the recovery scenarios for the American economy (see chart below): Amaral is clear in his assertion that we are in a recovery, albeit a very weak one, meaning the latest downturn lasted almost an entire decade less than the Great Depression. “It is no wonder that people are throwing out words like subpar or anemic to describe the current recovery,” Amaral said. “But compared to what? One way to establish a point of reference is to look at past recoveries.” He goes on to give a strong argument against this column: “One of the problems economists struggle with when putting this recovery in perspective is that, except for the Great Depression, there is no other recession of this magnitude to compare it to.” Fair enough. But just because we have no other downturns to compare to this mess we are in, why does the Great Depression win by default? Amaral even doubts the comparison, saying his metrics are missing both a financial intermediation and a housing sector. “So it is, by definition, unable to capture any frictions in these markets,” he said. “It is nevertheless a benchmark that is informed by theory, although what that means regarding its usefulness ultimately depends on how good the theory is.” So in theory the current economic downturn can be compared to the Great Depression. But what about the facts? From the stock market crash in the fall of 1929 to the end of 1933, the time span quoted by Zillow, about 9,000 banks closed resulting in depositors losses of about $1.3 billion. According to a Rutgers white paper, 24,000 banks held $49 billion in deposits in 1929. Four years later, that number shrank to 11,000 banks with $23 billion in deposits. Also, unemployment in 1932 averaged 23.6%. Today, Citigroup is the seventh largest global financial institution with nearly $2.2 trillion in assets. The apples to oranges comparison of today to the Great Depression may read well in theory, but in practice? The experience isn’t even close. Jacob Gaffney is the editor of HousingWire. Write to him.
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