The notion this is the worst economic crisis since the Great Depression keeps popping up, but is it really? It just may be before this is over: we’re not out of the woods yet, but in many ways, the current crisis isn’t even as bad as the Savings and Loan crisis in the 1980’s.
Bank Failures Are Actually Quite Low
As of October 13th of this year, 15 banks have failed with a total cost to the FDIC of much less than $20 billion. Contrast that with the Savings and Loan crisis where more than 700 S&L’s went under, causing an over $100 billion deficit for the S&L version of the FDIC due to a slow commercial real estate market coupled with bad developing-nation loans.
Interest Rates Are Low
Prime interest rates peaked around 21.5% in the 1980’s. The prime rate, of course, influences everything from mortgage rates to the interest corporations must pay to finance investment and create jobs to the rate the US Treasury pays on the national debt. Currently, the prime rate sits at 4.5%, or barely 1/5 its 80’s peak. Unlike then, people and corporations can still afford to borrow to finance future investment, which should help speed the recovery somewhat.
Leverage Is The Problem
The main problem facing today’s economy is the massive amount of leverage many institutions took on to buy questionable assets. It will take time to work these bad assets out of the system and yes, things will probably get worse before they get better. But are things really as bad as the media implies? Maybe, but it’s not like we haven’t overcome worse situations in the past.
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3 responses so far ↓
1 Andy // Oct 16, 2008 at 10:30 am
I think alot more banks would have gone bust this time around if it wasn’t for all the government intervetion. We have already spent more than 1. 5 trillion dollars on the current crisis, far more than the 80’s. Also, there is still a way to go yet and the FDIC may need government assistance in the not to distant future.
2 Curt // Oct 16, 2008 at 11:17 am
Your right, today we have low unemployment and low interest rates. But, that is going to change over the next few years.
So, today is the day to plan for what is coming. Get ready for high unemployment and high interest rates and high inflation.
3 Uncommonadvice // Oct 20, 2008 at 12:48 pm
Now is worse than the 80s in the UK. In the 80s you’d get a council house if you were repossessed but now there is no such thing.
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