04/29/2009 04:28 PM

Is 2009 the New 1929?

Current Crisis Shows Uncanny Parallels to Great Depression


Is history repeating itself? The current global downturn has many parallels to the Great Depression. And if the current massive bailout packages fail, the effect on the world's economies could be similarly drastic.

The Germans have always had a penchant for looking to America to gain a glimpse into the future.

They marveled at the Apollo 11 mission to the moon. They admired the gray but affordable Commodore personal computer. And they succumbed to the spell of an Internet company with the odd name of Google.

Will the current crisis be as bad as the Great Depression?

Will the current crisis be as bad as the Great Depression?

Now the Germans are looking across the Atlantic once again, but this time they see images that remind them of their own past, images of sad-looking people standing in long lines, hoping for work.

One of them is Michael Sheehan, who worked as an engineer with a large company until February. Not too long ago, Sheehan was the one doing the hiring. Today he is only one of 900 other job-seekers attending a job fair in a depressing hotel ballroom in Philadelphia.

One of the flyers arranged on the tables exhorts the attendees to "Stay Positive." But Sheehan feels more outraged than positive. Someone at the fair asks him for his resume. "I don't have a resume," he says. "I worked at one company for more than 30 years."

Natalie Ingelido, 21, is standing nearby, trying to calm down her bawling two-year-old son, who clearly doesn't like it here. "I'm looking for a job, any job, in a restaurant, a bar, cleaning, whatever," she says.

In the past, says Ingelido, "Help Wanted" signs were plastered on the doors of shops and bars. The past she refers to is last summer, when Natalie and her husband still lived in their own apartment. Now they live with his parents.

Across America, people like Sheehan and Ingelido are standing in lines, waiting and hoping. At one job fair in New York, the line stretched for several city blocks. Many would turn away, embarrassed to be seen there, whenever TV reporters attempted to document their fates.

More than 5 million people in the United States have lost their jobs since the crisis began. As if the country were undergoing fever convulsions, more than 650,000 were catapulted into the streets in the last month alone.

Most experts are now convinced that Germany will follow the United States along this downward trajectory. And those who, like many a politician, had refused to believe it until now were disabused of that notion last week.

Wednesday was a dark day for the leaders of Berlin's grand coalition government, which comprises the center-left Social Democratic Party (SPD) and the conservative Christian Democratic Union (CDU). All their hopes that the skies over Germany could quickly brighten -- just in time for September's national election -- were suddenly dashed when leading economic institutes released their annual forecasts, which turned out to be even gloomier than expected: a 6 percent shrinkage in the German economy this year, followed by another year with no economic growth.

Unemployment will rise sharply. It is expected to exceed 4 million by this fall and hit 5 million by next year. By then, at the latest, the crisis will have become reality for millions of people, as it reaches private households, forces more companies into bankruptcy and pushes countless loans into default, only making things worse for the country's already ailing banks.

Politicians around the world are forced to look on as the economic crisis jumps from one industrial sector to the next and spreads to more and more social groups. They are the witnesses of a reality that repeatedly debunks their worst prognoses as being all too optimistic.

They are approving billions in government spending for economic stimulus programs and bank bailout packages, and pumping more and more money into the economy to rejuvenate the economic cycle. But no one knows whether this medicine actually works -- and if it does, when it will take effect.

Graphic: Parallels between current crisis and Great Depression

Graphic: Parallels between current crisis and Great Depression

Politicians, in their desperation, are clinging to even the tiniest glimmer of hope. At the opening ceremony of the Hanover Trade Fair early last week, where the number of exhibitors had just about remained stable, Chancellor Angela Merkel announced that the worst appeared to be over.

At an economic summit at the Chancellery a few days later, none of the 31 invited representatives of industry was willing to share this optimism. Instead, the meeting was marked by pessimism and a deep sense of helplessness. The mood reminded one of the attendees of a "funeral wake."

It appears that the German federal government, labor unions and employers have exhausted their options. As a result, the course of the meeting was predictable. The assembled representatives of industry groups used the opportunity to present the government with their familiar demands. The invited economists argued over terminology and forecasts, and the members of the government snubbed those officials who had expressed their opinions somewhat too loudly of late.

The mood at the Chancellery only worsened in response to the grim forecast for growth presented by Hans-Werner Sinn, the president of the Munich-based Ifo Institute for Economic Research, who predicted that the worst is yet to come. According to Sinn, German banks will have to make write-downs equivalent to up to 90 percent of their capital, while most businesses hold a pessimistic view of the future. Sinn even believes that deflation is possible, a situation in which demand would continue to decline despite falling prices.

But not all of the economics professors in attendance agreed with the Munich economist's theories. Wolfgang Franz, an economist from the southwestern German city of Mannheim, said that he believed that the economy could fall back into step more quickly than others predicted. Axel Weber, the head of Germany's central bank, the Bundesbank, made it clear that he sees possible inflation as a much greater threat. By the end of the economists' presentations, the attendees were no longer sure which danger they were supposed to combat.

Deflation, inflation, mass unemployment -- these are words reminiscent of the darkest chapter in economic history. Thus, it comes as no surprise that experts are mentioning with growing frequency a term that was believed to have been relegated to the history books: Great Depression.

'The Consequences Are Real'

In the United States, the term "depression" has already crept into daily usage. Christina Romer, the chair of the Council of Economic Advisers appointed by US President Barack Obama, doesn't like to hear the comparison with the past. The Great Depression was Romer's field of expertise as an economic historian at the University of California, Berkeley, before she came to the White House under the new administration.

Now Romer has the feeling that history moved to Washington with her, that the past is alive once again and, on some days, is already beginning to look like the present. "In the last few months, I have found myself uttering the words 'worst since the Great Depression" far too often,'" she said in a recent speech at the Brookings Institution in Washington.

She went on to repeat all of the depressing references to the past: "The worst 12 month job loss since the Great Depression; the worst financial crisis since the Great Depression; the worst rise in home foreclosures since the Great Depression."

Even Ben Bernanke, the chairman of the US Federal Reserve, whose job requires him to be a professional optimist, finds it difficult to dispel the current melancholy. As a professor at Princeton, Bernanke wrote a substantial book on the world economic crisis. "I've always been more skeptical than others when it comes to predicting the potential effects of this crisis," he says. "Some people thought that we would get over this easily."

He chuckles, but it sounds more like a groan. "I hope that no one subscribes to that view any more. The consequences of this crisis are very real, and they are extremely serious."

But how serious? That's what everyone wants to know, and yet no one is able to predict how the crisis will continue -- not Romer, not Bernanke and not German Finance Minister Peer Steinbrück. Last week, Steinbrück admitted, openly and helplessly: "I don't know."

That's what makes this crisis so uncanny.

It's clear where it comes from, but no one knows where it is going. Will it continue to rage on at the same pace? Or will it subside, even just for a few months?

Or is the worst already behind us, as some market players seem to believe? They pushed Germany's DAX stock index up by 24 percent and the US's Dow Jones Industrial Average up by 22 percent in the last seven weeks. Is the market smarter than all of the experts, who were denying the possibility of a deep recession as recently as last year? Or is the market blind to the major fault lines in the world economy? The mood on Wall Street remained positive for a long time after real estate prices began tumbling in the fall of 2007.

Graphic: Economic forecasts for Germany

Graphic: Economic forecasts for Germany

Every small sign of hope is eagerly interpreted as a turn for the better. When the Ifo Business Climate Index, an early indicator for economic development in Germany, rose last Friday, the DAX promptly added 3 percent -- even though a majority of the firms polled by Ifo Institute expect the situation to worsen even further.

The crisis is currently putting an excessive burden on everyone. It behaves like an aggressive, previously unknown virus, changing its appearance and speed from week to week. At first, it looked like an American real estate crisis, then a banking crisis, a market crisis and a financial crisis. But the virus was consistently worse than the words that were being used to describe it.

At the beginning of the crisis, everyone felt that it was someone else's problem. Carmakers thought that it was a crisis for banks. The Europeans thought that it was an American problem. The rich believed that it would only affect the poor. The opposition felt that it was the government's crisis.

Today, everyone knows that these notions were too short-sighted. The virus is raging in all parts of the world, and striking at all levels of society. The pathogen has spread more quickly than all other pathogens in the past. It is invisible, but the trail it leaves behind is not pretty.

'No Land in Sight'

At the container terminal in the northern German port city of Hamburg, only 12 of 100 parking spots for trucks that transport containers to and from the docks are occupied. "Only a year ago, they had to wait in line for a spot," says dockworker Gerhard Hamann.

Things are even worse in Bremerhaven, another northern German port city, where German cars are shipped to destinations around the world. The automobile shipping industry has lost almost half of its business, and the company that provides harbor services has plans to lay off more than 1,000 of its 2,700 employees.

In the boom days of globalization, German cars were hot items, status symbols for the nouveau riche in China, Russia and India. German machinery was in high demand when large sums of money were being invested in emerging economies. As a result, Germany, the world's leading exporter, benefited the most from globalization. Conversely, the effects of a shrinking global economy are felt all the more acutely in Germany.

As the virus rages, it is already claiming its first victims. German industrialist Adolf Merckle threw himself in front of a moving train because his life's work, which includes the companies Ratiopharm, a pharmaceutical company, and HeidelbergCement, was threatened.

David B. Kellermann, the chief financial official of the US's second-largest mortgage lender, Freddie Mac, hung himself at his home in a Washington suburb last week. "It is plain that at Freddie Mac, as at many of the companies in the center of this economic storm, there are forces so strong they can overwhelm almost anyone," wrote the New York Times.

No part of the world is currently unaffected by the crisis. From the United States to China to Germany, the pictures of devastation are the same. Poor countries, especially in Africa, are even worse off. According to a report by the World Bank and the IMF, the global recession will plunge up to 90 million into extreme poverty and drive up the number of chronically hungry people to more than 1 billion.

Emerging economies are also getting nowhere fast. In fact, they have been brought to their knees. As Western consumers cut back on spending, much of their export industry is at a standstill. In March alone, Taiwanese exports dropped by 30 percent over the previous month. Hundreds of empty freighters are at anchor off Singapore's port, while Japanese Prime Minister Taro Aso sees "no land in sight" for his country.

In Latin America, Western companies are pulling out their investments en masse. In Brazil, half of the 35 modern ethanol plants planned for 2009 and 2010 will not be put into service. Western capital is flowing back into the country that triggered the crisis in the first place. US treasury bonds are now considered a safer investment than the biofuel business.

At the same time, prices for many crops have dropped sharply -- the price of soybeans, for example, has declined by 40 percent -- meaning the Brazilian economy is caught in a dangerous pincer movement. The country's traditional sectors are no longer viable while new businesses are not yet fully developed.

Even export giant China is losing steam. Chinese exports fell by 25 percent in February, a number Bank of America calls "ugly."

Donating Sperm to Beat the Crisis

All eyes are on the US, the country where the disaster began. American consumers have lost their erstwhile reputation as the engine of worldwide growth. Instead, they are now seen as reserved and uncertain, potential consumers who need strong persuasion before they buy anything. Chains like Pizza Hut are offering customers who buy a pizza a second one for a penny, while car dealers are trying to entice customers by offering a second vehicle for $1 -- if only the consumers would buy the first one.

New business ideas are cropping up, providing ways for budget-conscious Americans to earn a quick buck.

Phil Maher, who runs the Web sites and, which feature information on how people can earn extra income by donating blood and sperm, says that traffic to his sites has grown by 50 percent and 80 percent respectively in recent months. Men, he says, are mainly donating sperm. "You can donate every two to three days, twice to three times a week if you're lucky," Maher told the news agency AFP. "Three times a week, $100 per donation -- with a year's commitment it can get really interesting."

Germany hasn't reached this stage yet. Many Germans are nervously awaiting whatever comes next. They still have their jobs and are still collecting their salaries, and yet the uneasy feeling that things could take a turn for the worse is difficult to dispel.

In fact, many are now wary of the reality they see around them, a reality imbued with ominous words like "still" and "until now," words that rob one's feeling of security.

Many can take comfort in the fact that their favorite stores are still open, and that their own employers have not resorted to layoffs -- yet. Most Germans are doing well, but how much longer can it last? A classic German company like Porsche is still a strong carmaker -- or is it?

Humanity has yet to find cures for diseases like AIDS, Alzheimer's and Parkinson's, even though all the relevant data for these illnesses can be found inside a single body.

But the economic crisis is taking place in 6.5 billion minds at the same time, making it the biggest psychodrama in world history. Experiences and television images become condensed into expectations, expectations turn into fears, and fears shape what is happening in every market today. These fears exert a stronger impact on markets than politicians and central bankers, with their speeches and their programs. The virus has eluded the powerful.

The entire world is now on edge, causing large numbers of people and businesses -- from housewives to CEOs to bankers -- to hesitate and take a wait-and-see approach to things. This partly explains why the World Bank and the IMF predict a decline in global economic activity in 2009 -- for the first time since World War II.

In its most recent report, the Organization for Economic Cooperation and Development (OECD) writes: "The world economy is in the midst of its deepest and most synchronized recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade." According to the OECD, by 2010, the gap between our current economic potential and the current output of goods and services will be twice as large as in the early 1980s, when many countries faced their most severe recession since World War II.

One has to go back even further in time to find anything comparable -- to a time when photographs were still in black and white and life was grim.

Graphic: Parallels between current crisis and Great Depression

Graphic: Parallels between current crisis and Great Depression

The Great Depression was the primal event of the last century, the root of all evil in the 20th century, including poverty, mass unemployment, Hitler and total war. It is a painful comparison to make, because it presupposes an inevitability that, of course, doesn't exist.

Drawing this historical analogy is dangerous, Frank Schirrmacher, a co-publisher of the heavyweight German newspaper Frankfurter Allgemeine Zeitung, warned last fall. According to Schirrmacher, it creates precisely the reality that it warns against, conjuring up "a social type -- that of our grandparents or great-grandparents -- with which an insecure and outclassed society can, at the very least, identify."

Comparing is not the same as equating, but it improves our understanding. The past illuminates the present, the German philosopher Karl Jaspers once said. But perhaps the comparison will also show that the differences are greater than the similarities.

Is 2009 a new 1929? "I believe and hope it is not, but I wouldn't be surprised if I were wrong," says Robert Samuelson, a leading US commentator on economic issues.

When Nobel laureate Paul Krugman was asked the same question recently, he reflected for a moment before responding. Finally, he said, with his trademark thoughtfulness: "It's impossible to rule out anything at this point."

Today's data are still a long way from the dramatic -- and, for many, traumatic -- economic statistics of the Great Depression. In the United States, the epicenter of the current crisis, a quarter of all citizens available to work were unemployed at the height of the Great Depression. Today, only 8.5 percent of Americans who are available to work are unemployed.

Between September 1929 and June 1932, stock markets lost up to 85 percent of their value, representing a massive destruction of wealth. By comparison, today's Dow Jones index has lost only about 40 percent of its value. But the total value wiped out by the crisis exceeds the destruction of wealth in the Great Depression several times over, even when adjusted for inflation. This is because there is simply more money invested in stocks today than there was 80 years ago.

At the time, the entire US economy shrank by almost a third, as tens of thousands of factories, stores and banks went out of business. Between 1929 and 1932, 5,000 banks filed for bankruptcy, and another 4,000 financial institutions went under in 1933, at the height of the financial crisis. These bankruptcies meant that roughly one-fifth of American banks disappeared.

In the current crisis, only a few dozen financial institutions have declared bankruptcy. Nevertheless, today's banks are not in a significantly better position than banks were during the Great Depression. Their balance sheets remain burdened by toxic assets.

The government continues to inject new, clean money into the economic system. Although this doesn't make banks healthy, it at least prevents their demise. Nevertheless, many institutions are now known in the industry as "zombie banks" -- banks that continue to exist like the undead.

During the Great Depression, governments, especially in the United States, stood by and watched as the crisis deepened. The economy stumbled -- and the government allowed it to fall, leaving citizens, banks and companies to their own devices. Governments today, however, are coming to the rescue with billions in bailout funds. This is an important difference, as Obama's adviser Christina Romer is quick to point out.

Unfettered Capitalism

In 1930, the first year of the crisis, the German economy was caught in a downward spiral, as the population became more and more impoverished each day. Unlike today, very few citizens could claim significant benefits under unemployment insurance, and many were dependent on meager local assistance programs.

The victims of the crisis included people who, as the then-mayor of Cologne, Konrad Adenauer -- who would later become the first chancellor of West Germany -- once said, "would never have had to rely on public assistance in normal economic times: pensioners, independent craftsmen and tradesmen."

Germans did their best to limit their consumption. One Berlin newspaper, the Berliner Lokalanzeiger, reported that people would drive to restaurants on the outskirts of the city catering to day-trippers, and would often "order only a bottle of mineral water and eat cake they brought along from home."

Foreclosure auctions were announced in the newspapers on a daily basis. Bakers decorated cakes with sayings like: "This cake is small, because I too am out of work!"

Cafés saved costs by eliminating live bands, playing music from the radio instead, and by serving glasses of milk for 10 pfennigs instead of sparkling wine.

In our day, there is more fear than suffering. Germany now boasts a relatively sizeable and stable social welfare state, and even the United States of today cannot be compared with the America of the 1930s.

Capitalism was primitive and unfettered at the time. In the United States, government spending as a percentage of gross domestic product was barely 10 percent at the end of the 1920s.

Today, the same ratio amounts to around 40 percent in the United States and 44 percent in Germany. As a result, governments have economic forces at their disposable that they can now put into action.

During the Great Depression, workers who lost their jobs usually ended up directly on the street. Unemployment meant poverty, while prolonged unemployment led to a slide into economic misery.

Both the German and the American welfare states are much stronger today. The United States has unemployment insurance benefits (albeit relatively small), a mandatory social security system and health insurance for retirees and children. In addition, 32 million Americans, or more than 10 percent of the population, receive government food stamps.

The greatest similarities between 2009 and 1929 have to do with the causes of the crisis. The history leading up to the Great Depression reads like a review of the last decade.

In both eras, people were enamored of the present. They celebrated themselves, and they consumed and invested -- doing both with money they didn't have. They failed to notice growing economic imbalances, and they ignored the trouble brewing in the global economy.

People in the 1920s were fascinated by progress and the fashionable new products it spawned, including cars, airplanes, radios and telephones.

They were finally able to take part in the latest technical achievements. For only two months' worth of wages, a worker at Ford could buy himself the first affordable automobile, the Model T, popularly known as the "Tin Lizzy."

The stock markets also came under the spell of modernity, as more and more citizens became fascinated by stocks and invested their savings in the market. People at all levels of society were suddenly overtaken by a new stock market fever.

Unbelievable stories made the rounds, like the tale of a New York valet who made a quarter of a million dollars in the stock market, or the nurse who became $30,000 richer on the basis of a stock tip she had received, or the shoeshine boy who bought stocks worth $50,000 for $500 in cash.

Many investors speculated with borrowed money, convinced that they would be able to pay off their debts when their shares appreciated. The American fondness for buying things on credit was already very pronounced at the time. More than half of all cars and three-quarters of all furniture bought in the 1920s were financed on credit.

John Kenneth Galbraith, the great student of the world economic crisis, wrote that a "mass escape from reality" had brought movement into the markets -- not in slow, sedate steps, but by leaps and bounds. According to Galbraith, a mass exodus into an economic world of make-believe had begun.

Everyone was convinced that the stock market boom in God's own country could only continue, perhaps not indefinitely, but certainly for several more years. Homebuyers in the United States felt the same way until recently. They too were living in an illusory world, except that this time it consisted of their own homes.

Politicians played a less than admirable role in both eras, encouraging people to do the wrong things.

President George W. Bush told Americans to "go shopping" after the terrorist attacks of Sept. 11, 2001 had shaken the country to its core. The Federal Reserve, America's central bank, provided low interest rates. As a result, economic growth in the United States was driven, not by rising exports or groundbreaking inventions, but by consumption paid for with credit. The US had "the best recovery that money can buy," says Kenneth Rogoff, a former chief economist at the IMF.

A similarly unshakable belief in the future prevailed in the 1920s. In the 1928 election campaign, President Herbert Hoover crowed: "We in America today are nearer to the final triumph over poverty than ever before in the history of any land."

As late as November 1929, the Harvard Economic Society was still declaring that "a serious depression seems improbable."

In both eras, the drama began with a crash. "Despite many differences in terms of detail, the market crash of 1929 and the banking crisis of 1931 closely resemble the problems of today," says economic historian Werner Abelshauser.

The bankruptcy of US investment firm Lehman Brothers, for example, bears a fatal resemblance to the events that led to the demise of Germany's Danat Bank. The Danat Bank drama ran its course on the evening of May 11, 1931, when the bank's chairman, Jakob Goldschmidt, was informed during a dinner that his most important client, the Bremen-based textile giant Nordwolle, had falsified its accounts and was hopelessly insolvent. "Nordwolle is finished, Danat Bank is finished, Dresdner Bank is finished, and I am finished," he said frantically.

Goldschmidt was not wrong in his assessment. Danat Bank was indeed finished, and every major Berlin bank was in trouble. The debacle was followed by a crisis meeting of politicians and bankers on the weekend of July 11 and 12.

Underestimating the Crash

The large conference room at the Reich Chancellery at Wilhelmstrasse 77 in Berlin was filled with dignitaries from the world of politics and money. Contemporary observers reported that the mood in the room was extremely tense. As Hjalmar Schacht, the then president of the central bank, the Reichsbank, recalled, the bank directors were hurling "accusations at each other concerning their financial condition and business practices."

But the bankers downplayed the gravity of the situation in their discussions with politicians. Then-Deutsche Bank Chairman Oskar Wassermann even insisted that the situation among Germany's major banks was "no worse than anywhere else in the world." The bankers sought to portray the Danat failure as an isolated case and treated Goldschmidt "like someone with the plague," as then-Chancellor Heinrich Brüning wrote in his memoirs.

When Brüning asked the bankers about the condition of Dresdner Bank, "the question alone was perceived as an insult," as he wrote. Three days later, Dresdner was ready to be bailed out.

The events in Germany were mirrored in the United States. First the banks came down, followed by their customers -- manufacturers, department store barons and small businesses. After that, all economic activity went into a tailspin, something the modern world had never quite experienced before.

Global trade volume fell by 30 percent in three years, while industrial production shrank by 37 percent. It was a shocking experience for everyone involved, from beggars to businessmen.

The official unemployment figure in Germany rose to 6.1 million by February 1932, but real unemployment was in fact much higher.

Today's contractions in the overall economy and the labor market are relatively modest by comparison. The US economy is expected to shrink by 3 percent in 2009, while Germany will experience a significantly greater decline.

The comparisons between the current crisis and the Great Depression are indeed problematic. What exactly is being compared? One set of statistics represents the ultimate outcome of the Great Depression, but what do today's statistics signify? Perhaps merely the beginning of the current crisis?

In the late 1920s, the crisis began when it was underestimated. No one recognized the events of the day as the turning point they would eventually become. So much was whitewashed and so many people were placated. If speculation was the mother of the crisis, its father was naïveté. The players, says the economic historian Werner Abelshauser, lacked an "awareness of disaster."

At one point, on October 24, 1929, the Dow Jones index fell from 305 to 272 points. The next day, the headline in the New York Daily Investment News declared: "Stock Market Crisis Over." The chairman of the New York Stock Exchange continued his honeymoon in Honolulu.

The stock market would not hit bottom until three years later when, in July 1932, the index fell to 41 points. It would take the market another 22 years to reach its pre-crisis level.

Politicians at the time, not unlike politicians today, were notoriously optimistic at first. President Hoover heralded a recovery, but the real downturn was yet to come. When his successor, Franklin D. Roosevelt, came into office in 1933, he too believed that the worst was over -- and he too would be proven wrong.

President Obama, also unable to resist temptation, used the first halfway positive economic data to instill confidence in the public. In mid-April, he said the economy was showing "glimmers of hope," while his chief economic advisor, Lawrence Summers, said that the sense of "unremitting freefall" in the US economy had disappeared.

But that was before the IMF revised its forecasts drastically downward. By that point, there could be no question of an end to the crisis or even a reversal of the current trend.

When Obama gave a speech to workers in Iowa last Wednesday, the talk of glimmers of hope had already evaporated. This time, the president told his audience to be patient and bold, not to give up hope, and to believe in America's future. He looked tired. His staff said that he was still exhausted from his European trip.

In the decade following 1929, there were repeated signs of a recovery, and politicians were not the only ones to eagerly grasp at every hopeful opportunity. People believed that they had put the worst behind them, and yet their hopes were deceptive. An even bleaker future lay ahead.

Even John D. Rockefeller, the richest man of his day, was mistaken in his assessment of the markets. At the end of the week of the 1929 crash, he returned to the market and bought stocks, "believing that fundamental conditions of the country are sound." Last September, Warren Buffett, one of the world's richest men today, made a similarly hasty decision when he invested $5 billion (€3.8 billion) in the firm Goldman Sachs a little more than a week after the Lehman bankruptcy. He would have turned a decent profit if he had waited a while longer.

More than anyone else, President Herbert Hoover would go down in history for downplaying the Great Depression. In December 1929, he said that it was "the strong position of the banks" that had "carried the whole credit system through the crisis without impairment." But the real banking crisis was yet to come.

In May 1930, the president boldly announced that he was "convinced we have now passed the worst and with continued unity of effort we shall rapidly recover."

German Chancellor Angela Merkel seems to be doing her best to imitate Hoover. In the spring of 2008, she believed that the crisis would "perhaps not affect Germany." She was quickly proven wrong. A short time later, Merkel said that German banks were in good shape, and yet the first of those banks had to be rescued soon afterwards.

Perhaps the most astute contemporaries are those who withhold judgment. When asked the question: "Can you explain what has happened?" Robert Solow, a winner of the Nobel Prize in Economics, simply shakes his head and says: "No, I don't think that normal economic thinking can help explain this crisis."

In light of the difficulties in comparing a past depression with a depression in its embryonic stages, it is worth taking a look at the speed of the respective processes of disintegration. It is an exercise that exposes the raw forces that prevail.

The current downward spiral exceeds all previous downturns when it comes to its intensity and speed. The United States has experienced seven recessions since 1947, which lasted 10 months on average. It was only in 1982 and 1983 that the unemployment rate climbed to around the 10 percent mark.

But this time jobs are being destroyed at a rate that suggests the outbreak of an epidemic in factories and office buildings. Last August saw 640,000 people being added to the unemployment rolls, followed by 629,000 in October, 255,000 in November and 632,000 in December, and the rate of new unemployment has continued unabated ever since. The US economy is currently losing about 700,000 jobs a month. At this rate, the 10 percent threshold will likely be exceeded at a gallop.

The Rise of Hitler

A similar decline in economic activity is also unprecedented in Germany. Most German economic research institutes now predict a 6 percent decline in growth for this year, and although the decline is not expected to be as severe in 2010, forecasts do not foresee growth.

These assumptions are not based on the opinions of business owners and consumers. Instead, they reflect the decline in orders for goods and services. Both the machine-building and steel industries report a 50 percent drop in orders. Indeed, it is hard to find an industry that is not shrinking dramatically.

Germany's postwar society has never experienced turmoil of similar proportions. The major economic tremors have always been felt in neighboring countries, brought on by France's nationalization policies in the 1980s, the withdrawal of the British pound sterling from the European Monetary System, and the conditions in Italy that led to the rise of current Prime Minister Silvio Berlusconi. "This is the first postwar crisis that we are not experiencing as someone else's crisis," says Wolfgang Nowak, the director of Deutsche Bank's Alfred Herrhausen Society.

One can only guess at the long-term political impact of today's crisis. The reason the comparison with the Great Depression is so horrifying is that the world economic crisis led not only to the impoverishment of large segments of the population in Germany and elsewhere, but also to a political catastrophe.

In the wake of the economic crisis, Germany fell into the hands of the Nazis. The slogan, "Hitler - Our Last Hope," was plastered on campaign posters in the 1930s. Many agreed with the sentiment at the time.

A bizarre political group that had formed around Adolf Hitler, a former vagrant and veteran of World War I, was suddenly catapulted to the center of the public eye. On May 2, 1930, Hitler, a man who had been ridiculed until then, was suddenly speaking to a packed house at Berlin's Sportpalast hall. Now the people, or at least a significant portion of the people, were eager to hear Hitler speak.

After the Reichstag election in the late summer of 1930, a splinter group had suddenly become a force to be reckoned with. The Nazi Party won 18.3 percent of the vote and 107 seats in the Reichstag, making it the country's second-most powerful party. The economic crisis had catapulted the party to power within just a short space of time.

Berlin is not Weimar. And the current economic crisis has not produced any noticeable political changes -- at least not yet. Demonstrations and protests by those affected by the crisis have attracted moderate crowds at best, as was the case at last week's demonstration outside the annual meeting of the Continental automotive parts company's annual meeting in Hanover.

This could change if the crisis worsens and unemployment rises significantly. But will that lead to "social unrest," as Michael Sommer, the head of the DGB federation of German trade unions warns? Could the situation in Germany become explosive, posing a threat to democracy, as Gesine Schwan, the SPD's presidential candidate, cautions?

Nothing so far suggests that this is the case. Both Sommer and Schwan have already been reproached for engaging in scare tactics, even by fellow party members like Frank-Walter Steinmeier, the SPD's chancellor candidate.

But what is realistic? How will the crisis change the country and the rest of the world?

When experts don't know what will happen next, they develop scenarios. And because future economic developments are so politically explosive, Germany's foreign intelligence agency, the Bundesnachrichtendienst (BND), has decided to address the issue.

In mid-April, BND President Ernst Uhrlau presented German President Horst Köhler with his analysis of the repercussions of the current situation. During the meeting at Berlin's Bellevue Palace, the president's official residence, the two men discussed a "metamorphosis in geopolitics" and the future political make-up of a world that will never be the same again.

The core message for the German government is that Europe and the United States will come under growing political pressure, and will face growing competition from China. Beijing will be one of the likely beneficiaries of future shifts on the political map.

Uhrlau believes that there are three possible scenarios. The first scenario, the most optimistic of the three, assumes that the current economic stimulus programs will work, leading to a rapid shift in trends in the stock and credit markets, and that confidence will return and the economy will pick up speed soon.

Under this scenario, the United States will remain the dominant superpower, but it will emerge from the crisis economically weakened and with less available capital to fund its military activities. The People's Republic of China would benefit from this development as the strongest exporting nation.

The Chinese will benefit even more if scenario two, which the BND calls the "China scenario," becomes reality. It describes what will happen if the billions from the West's economic stimulus programs end up primarily in Asian countries.

The foreign capital would reinvigorate Asian domestic markets, allowing Beijing to invest even more heavily in advanced technology and take over the prime assets of Western industry, thereby accelerating its modernization process.

This, in turn, would speed up China's process of catching up with the West. For Beijing, the crisis would serve as the catalyst for a development that has already been underway for several years. "China would develop even more strongly into a superpower in Asia and a reference point for countries like the Arab Gulf states and other raw materials producers," says Uhrlau. "The United States, on the other hand, could forfeit some of its dominant status."

India would also grow in the slipstream of the Chinese, though not as dynamically. The BND believes that under this scenario, competitors to central institutions like the IMF would take shape, such as an Asian Monetary Fund.

The third scenario is the most dismal. It describes the consequences if the economic stimulus programs are ineffective, which will become all the more likely the longer it takes for the recovery to emerge. It is a catastrophic scenario for large parts of Africa, as well as for countries like Argentina, Venezuela, Iran, Kazakhstan and parts of the European Union, which would come under massive pressure.

Countries like Yemen could turn into "failing" states, with central governments losing much of their authority, while the loss of aid payments from other countries would push countries like Jordan to the brink of insolvency. The flow of refugees to Europe would surge, benefiting Islamists worldwide.

In this scenario, the BND predicts mass unemployment for China, internal unrest and a loss of its monopoly on power for the Communist Party. This would constitute virtually a revolutionary development with grave risks to global stability, because it would prompt the government in Beijing to become more aggressive abroad to compensate for internal tensions.

The BND expects to see a blend of the first two scenarios emerge -- not exactly a soft landing, but not an all-out catastrophe, either. What all three scenarios have in common is the theory that, after this crisis, the world will likely not be as dependent on the United States and Asia will play a greater role than in the past. "There will be a development in the direction of regionalization," says Uhrlau, "and we will have to get used to a more self-confident China in the future."

But is the third scenario truly out of the question? Isn't it possible that the billions now being pumped into the economy could seep away without producing the desired effect, because the foundation of the economy has become so porous after years of being fueled by debt?

The End of American Hegemony

There are, at the very least, signs that this scenario is not quite as unlikely as some would like to claim. The severe crisis is affecting the United States, which is already in a weakened position, and it could accelerate the country's relative demise as a superpower which already began a long time ago.

American industry, or what is left of it, is already in a deplorable condition today. Detroit's Big Three carmakers, General Motors, Ford and Chrysler, have been ailing for a long time and are now on their last legs. In the last three years alone, the three companies have lost a combined $110 billion (€83 billion).

The history of the US auto industry -- and this is what makes the current situation so dramatic -- is the history of America as an economic superpower, from its brilliant ascent to its agonizingly slow demise. The GM model, characterized by massive marketing, little substance and an excessive policy of debt financing, has also become the country's model.

Never before has a country lived at the expense of the future with such reckless abandon. The United States today is an economy that sucks in the savings of other nations. America currently needs more than half of worldwide savings merely to avoid falling below the levels of previous years. The government and private households borrow roughly $1 billion (€760 million) on each business day. Three years ago, the country was only borrowing two-thirds of this amount.

Even when adjusted for the size of today's economy, the US's current debts significantly exceed debt levels during the Great Depression. The superpower has become an empire of debt.

The most dangerous element of President Obama's crisis management program is that this debt is not being reduced, but expanded. The US's national deficit will reach an estimated $1.8 trillion (€1.36 trillion) in 2009 and will only continue to grow after that, perhaps even doubling. About 40 percent of the national budget is already not being covered by revenues.

If only the problem were limited to the United States. But the situation that has been brewing on the periphery of the crisis is far more dramatic than it was in 1929.

This is mainly attributable to the fact that modern globalization had only begun at the time. Many of today's industrialized nations were agricultural economies, and were not linked to the global economic system.

Countries like Romania, Hungary, Russia, Latvia and Ukraine did not play a significant role at the time of the Great Depression. Today, they are either on the brink of bankruptcy or, like Russia, they are in serious trouble because the price of oil has declined dramatically and Western investors are pulling out their money.

The Institute of International Finance expects the flow of capital into the emerging economies of Eastern Europe, Latin America and Asia to fall to only $165 billion (€125 billion) this year, or one-sixth of the level of foreign investment in these countries only two years ago.

Eastern Europe, in particular, is suffering from a massive exodus of capital. The Hungarian forint has lost more than 20 percent of its value since last July, while the Ukrainian hryvna has declined by a third. The tailspin affects banks in Austria, Germany and Italy that had heavily invested in the region. In some countries, more than half of all loans were denominated in foreign currencies.

Experts like economics Nobel Prize winner Krugman believe that, barring a noticeable improvement in Eastern Europe, Austria could face national bankruptcy. Austria's wellbeing depends on the wellbeing of the Eastern Europeans. This, in turn, is closely tied to the influx of foreign investment capital.

There would be serious political consequences if any Eastern European countries became failed states. One would be a threat to the goal of European unification. A divided Europe would not be a peaceful Europe, as radical influences would quickly begin flowing from the edges of the continent towards its center, which is precisely where Germany is located.

The IMF is currently doing its utmost to prevent the collapse of these countries. Special task forces are being established, Hungary and Latvia are being supported and rescue programs for other countries have already been approved.

At its recent summit in London, the G-20 group of major industrialized nations voted to provide the IMF with an additional $500 billion (€380 billion) in lending capital.

Germany is also preparing itself for tougher times, at least in theory. As unemployment rises, tax and social security revenues will naturally decline. As a result, Germany will sink further into the red.

The Nuremberg-based Federal Labor Agency has already sounded the alarm, noting that its reserves will be depleted by this fall. Some €2.1 billion ($2.8 billion) have already been set aside for 2009 to pay for the large numbers of workers that are on short-time schemes, where the shortfall in their wages is partly made up by the government.

The government's reserves for social security benefits are likely to be tapped even further, partly to prevent the development of a politically explosive atmosphere. The "Agenda 2010" labor market and social system reforms adopted under former Chancellor Gerhard Schröder have helped to reduce the costs to the government of welfare programs. But in a crisis of the current dimensions, these laws could also lead to the rapid impoverishment of people who are still part of the middle class today.

Anyone who is unable to find a new job within a few months automatically becomes a welfare case in Germany. In the past, if a 57-year-old worker became unemployed, he would continue to receive 60 percent of his last net salary for 32 months. Only then would he qualify for unemployment assistance. Under the old system, he was able to keep his home and his life insurance policies. This helped to slow the descent into poverty.

Today, the same worker would lose his unemployment benefits after 18 months. If he fails to find a job after that, he stands to descend quickly into poverty. A person who is classified as long-term unemployed receives €351 ($463) a month in government assistance, as well as the cost of rent for "suitable" housing, which, for a single person, is generally restricted to an apartment no larger than 45 square meters (484 square feet). And he only qualifies for this assistance if his savings are minimal.

Germany could soon face a debate over the future of the social welfare state. "We must take an offensive approach to discussing the threat of impoverishment," says one SPD cabinet member.

The cabinet member insists that an amendment to the Hartz IV reforms is at the top of the political agenda, and that the Social Democrats cannot allow their political base to fall into the poverty trap.

Nevertheless, no one in Berlin is currently interested in actively discussing the issue. No one wants to be suspected of fueling public anxiety even further. Politicians are still holding onto the hope that things will not turn out to be as bad as expected after all. Everyone, in fact, still hopes that the differences between today's crisis and the Great Depression will be greater than the parallels.

Unlike 1929, the governments of the major industrialized nations today are generally in agreement and are combating the crisis together, a commitment they agreed upon at the London G-20 summit in early April.

Unlike 1929, the social welfare network, especially in Germany, provides citizens with a cushion against the most acute hardships. Under the Obama administration, America's social safety net is also being improved.

Unlike 1929, the world's major countries are flooding the economy with money to prevent deflation and, with it, a downward spiral of declining prices and income.

But no one knows whether this will suffice, or whether all the money being thrown at the aggressive virus fueling this crisis will only make it worse. Debts are being fought with debts, meaning that not only banks but entire countries could end up bankrupt. Perhaps the efforts to combat the current crisis are merely laying the foundations for the next crisis, which will be bigger still.

Economic historian Werner Abelshauser is among those who refuse to rule out anything. "History doesn't repeat itself," he says. But then he quickly adds: "Or does it?"


Translated from the German by Christopher Sultan


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