No Great Depression II Likely, Profs Say

Published January 1, 2009

The U.S. economy faces many dangers and uncertainties, but a return to conditions resembling those of the Great Depression of the 1930s does not appear to be on the horizon. That’s the conclusion of a group of economics professors from the University of Illinois at Chicago.

In late October, seven academics from the university’s department of economics discussed the current financial crisis in a crowded lecture hall on campus. The nearly two-hour session attracted 250 audience members. The professors agreed the economy has problems but doubted the country will experience anything like the Great Depression.

‘Nowhere Near It’

“We are nowhere near it,” said Prof. Houston Stokes. “At that time the unemployment rate was at 25 percent. Today’s rate of 6.1 percent is not good or great, [but it’s not even] close [to that]. We have a problem with [economic] excesses, but not a Great Depression.”

Prof. Paul Pieper agreed. “This is not the Great Depression,” he said. “The current bailout is distasteful, but we did not have much of an alternative. We are in a housing bubble, and investment banks have looked like commercial banks on steroids.” However, he said, in contrast to earlier crises, “We have tools today to help.”

‘Let Market Work’

Prof. Lawrence Officer, an international monetary policy expert, advocated letting the market solve the problem.

“It’s a bubble. Government shouldn’t bail out [the parties involved]. Nada. Nyet. Let banks go into Chapter 7 bankruptcy or merge with others around free-market lines,” Officer recommended.

“This crisis has to work itself out,” Officer continued. “The fault is not the real economy. We love Wall Street people, but don’t be fooled. Don’t let Wall Street and friends tap you for money.”

Finance Prof. Robert Chirinko characterized the current financial crisis as like driving on the Dan Ryan Expressway (a major Chicago roadway) and having one-third of the traffic just stop.

‘May Not Work’

Usually the Federal Reserve steps in with increases in the money supply and lower interest rates to curb such shocks to the economic system, but Prof. George Karras said such actions may not work this time.

“In the past, interest rates went to almost zero in Japan without helping, while at other times [in other places] the policy did work,” Karras said. He called for programs using “incentives and efficiency” to solve the problems.

Prof. Nathan Anderson, a specialist in real estate economics, said he has seen “constant surprises” recently.

“We have a lack of information in the current economy,” Anderson said. “Subprime mortgages are not bad in themselves but may look that way since the real estate market stopped going up. Housing may be a bad bet when inflation is taken into account. It is not a great investment then, only about a 1 percent annual return.”

John W. Skorburg ([email protected]) is associate editor of Budget & Tax News.