Economists warn of second Great Depression

Iconic: Frances Owens Thompson and her hungry children, photographed in 1936 by Dorothea Lange.

Will we be able to cope with an economic depression? Some believe the coronavirus will cause a downturn on a scale not seen since the 1930s, and we will need all our resources to survive.

“Will you be sleeping or jumping?” asked the New York hotel clerk.

So many people had rented rooms in order to throw themselves from a window that the question seemed worth asking. Life in the Great Depression was so tough that shanty towns for the homeless sprang up across the US – there was even one in Central Park. Broken-down cars pulled by mules to save on garage bills became a common sight.

America was just one of the countries affected by the slump of the 1930s. In Britain, 200 men marched 290 miles from Jarrow to London to ask for government help; Germany fell into economic chaos. Now, economists are warning that a similar crisis could lie ahead.

They are particularly worried about investments called collateralised loan obligations (CLOs). These involve lending money to companies in so much trouble that they would not normally be able to borrow anything. Because of this, they pay very high rates of interest so, potentially, a large profit can be made from them.

But there is also a big risk that they will go bankrupt and pay little or nothing.

CLOs became popular on the assumption that although some companies would go bankrupt, it was unlikely that a lot of them would at the same time. But the pandemic has made the risk much higher, and the sums that banks stand to lose are enormous.

One estimate is that they could lose money on two-thirds of the loans they have made, amounting to tens of billions of pounds – and go bankrupt themselves.

In the 2008 crash, governments saved banks by putting money into them. But that proved so unpopular that it is unlikely to happen again. According to the economist Frank Partnoy, “Sometime in the next year, we will all stare into the financial abyss.” It might become impossible to borrow money to buy a car or a house.

But if a depression does come, it will be to a world very different from the 1930s. Now, thanks to the modern welfare state, people can expect far more help from the government. And, because a lot more women work, many families have two earners, so they can cope better if one is made redundant.

Also, thanks to the internet, there is much more community support available for those who are struggling.

Will we be able to cope?

Gloom and doom

Some say, yes. A famous study of an Austrian village in the 1930s found that the greatest problem was apathy: people were so depressed that they could not be bothered to read books or take part in communal events. But the internet makes stimulation of some kind open to almost everyone. And, thanks to the lockdown, we have found there are many things we can do without, such as foreign holidays.

Others argue that work is what gives most people a sense of fulfilment, so to lose your job today is as devastating as it ever was: one definition of a depression is an economic downturn in which unemployment exceeds 20% for a long period of time. Governments have paid out so much money to keep people going during the pandemic that they will have little left to help in another crisis.

You Decide

  1. What would you find easiest to give up in order to save money for your family – and what would you find most difficult?
  2. Should banks be nationalised?

Activities

  1. Draw a map of the route followed by the Jarrow marchers.
  2. Do a painting of a car pulled by mules.

Some People Say...

“The only function of economic forecasting is to make astrology look respectable.”

John Kenneth Galbraith (1908-2006), Canadian-American economist

What do you think?

Q & A

What do we know?
A depression can lead to huge political changes. In Germany, which had already suffered a financial crisis with hyperinflation in the 1920s, widespread poverty and unemployment made people open to extremist propaganda, resulting in the rise of the Nazi party. By the end of 1934, Hitler’s position as chancellor was completely secure.
What do we not know?
Exactly how long the Great Depression lasted, and who gave it that name. Its starting point was the Wall Street Crash of 1929, when the US stock market plummeted; some economies began to recover in 1933, but others were still suffering at the start of World War Two. In 1934, Lionel Robbins, a British economist, published a book called The Great Depression, which may have made the name stick. Earlier financial crises had been called “panics”.

Word Watch

Shanty towns
Areas of improvised housing made out of whatever comes to hand. In 1930s America, they were called Hoovervilles after the president, Herbert Hoover.
Central Park
A large open area in the middle of New York. The café in the TV series Friends is called Central Perk as a pun on its name.
Mules
The offspring of a donkey and a horse.
Jarrow
A town in north-east England. The march in 1936 followed the closure of a shipyard which employed 80% of the local workforce.
Abyss
Something so deep that it seems impossible to measure. The term comes from a Greek word meaning “bottomless”.
Welfare state
A state in which the government gives its people social and economic support. In Britain, it began to take shape at the beginning of the 20th Century with moves such as the introduction of free school meals, but it was greatly expanded after WWII.
Redundant
No longer in employment because there is no more work available.
Apathy
Lack of interest, enthusiasm, or concern.

Subjects

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