Depression 2.0

How close did we come to falling into a Depression last year?

Pretty damned close, according to Robert Samuelson.

"Depression" is a term of art. It's more than a serious economic downturn. What distinguishes a depression from a harsh recession is paralyzing fear of the unknown -- so great that it causes consumers, businesses and investors to retreat and panic. They hoard cash and desperately curtail spending. They sell stocks and other assets. A devastating loss of confidence inspires behavior that overwhelms the normal self-correcting mechanisms (lower interest rates, inventory resupply, cheap prices) that usually prevent a recession from becoming deep and prolonged: a depression.

Comparing 1929 with 2007-09, Romer finds the initial blow to confidence far greater now than then. True, stock prices fell a third from September to December of 1929; but fewer Americans then owned stocks, and prices had risen early in the year. Moreover, home prices barely dropped. From December 1928 to December 1929, total household wealth declined only 3 percent. By contrast, the loss in household wealth between December 2007 and December 2008 was 17 percent -- more than five times as large. Both stocks and homes, more widely held, suffered larger losses.