Any questions about the impact of the global financial crisis of 2008 on the real economy should by now have been answered. Corporate announcements have had one theme in common this January, retrenchment. No sector of the economy, global or domestic, seems unscathed. From Microsoft to Smurfit Stone, Corus to Barratts Shoes, Intel to Independent News and Media there are real companies losing value, profits and reducing their workforce every day – real people losing real jobs.
The similarities with the economic collapse in the US in 1929, which led to the depression of the 1930s, are uncanny. The effects of that depression included:
• 13 million people became unemployed.
• Industrial production fell by nearly 45% between the years 1929 and 1932.
• Homebuilding dropped by 80% between the years 1929 and 1932.
• From the years 1929 to 1932, about 5,000 banks went out of business.
• By 1933, 11,000 of the US’ 25,000 banks had failed.
• In 1933, 25% of all workers and 37% of all nonfarm workers were unemployed.
• Between 1929 and 1932 the income of the average American family was reduced by 40%.
The turning point in the depression was in 1933. Some economists attribute the recovery to the Emergency Banking Act which was passed on 9 March 1933. Under the Act, insolvent banks were closed and after federal inspectors had declared them to be financially secure, those banks that were strong enough to survive, were reorganised and reopened.
Whether the so called Bank Holiday was the solution or not is unclear. What is clear is that decisive action was taken. Over-lending was penalised. Banks were allowed to fail. Those who had taken a more prudent approach survived. It seems straightforward enough and a simple message for legislators to communicate. Why then have we nationalised one bank and do we seem headed for at least part-nationalising others? The risk is that we are deferring the decisive action which, as with putting any difficult decision off, will only prove more painful and costly in the long run.