Was 2008 the beginning of another Great Depression?

WASHINGTON — It wasn't 1929, but like that infamous year, 2008 is sure to be remembered by economic historians as one unlike any other.

"We had a much simpler financial system back then. The number of wild and crazy things that happened this year is completely without precedent in world history," said Alan Blinder, a Princeton University economics professor and a former vice chairman of the Federal Reserve.

Where to begin? In March, there was the overnight collapse of Wall Street titan Bear Stearns, in hindsight the first domino to fall in what would become a meltdown of the global financial markets.

Maybe July's record oil prices of $147 a barrel, which helped spark inflation and send food and commodities prices spiraling upward worldwide? That gave Americans gasoline at more than $4 a gallon, and everyone said that gas would never be cheap again. On Wednesday, however, crude oil prices fell to just more than $37 a barrel, and gasoline was down to a nationwide average of $1.66 a gallon, thanks in part to the global downturn.

Then there was September's government seizure of mortgage finance giants Fannie Mae and Freddie Mac, which own or back more than half of all U.S. mortgages. Washington, however, let investment giant Lehman Brothers collapse in a shock wave felt around the globe.

Unfortunately, that's not the half of it. In September, the Federal Reserve also took an ownership stake in insurance behemoth American International Group, followed by the $700 billion Wall Street rescue package that Congress grudgingly passed in October, with little supervision over how the money would be spent.

Then there were the record nationwide home foreclosures and the 13.2 percent year-over-year drop in median home prices nationwide through November, the biggest drop since, yes, the Great Depression.

Capping off the year, December brought the grim-faced chief executive officers of Detroit's Big Three automakers begging for a lifeline to avoid bankruptcy. Fed Chairman Ben Bernanke and his colleagues dropped a benchmark lending rate almost to zero — the lowest ever — in an attempt to thaw the deepest freeze ever seen in the credit markets.

Investors were so averse to risk late this year that the yield on short-term Treasury bonds briefly went negative twice. Yet investors were opting to lose money on them, perceiving Treasuries as the safest investment to have; better to lose a little than risk losing more elsewhere.

"I have been around awhile, and I have never seen the economy decline more rapidly than it has in the past few months," said Lyle Gramley, a Fed governor from 1980 to 1985 and an economic forecaster since 1964.

At 81, Gramley offers the long view. A child during the Great Depression, he remembers seeing able-bodied men reduced to begging.

"I remember men standing in a soup line that was three or four blocks long just for a bowl of soup," he recalled. "People don't remember how bad things can get."

Back then, federal cluelessness allowed the U.S. economy to slide into the Great Depression. That's a mistake that Bernanke, a scholar of the Depression, isn't repeating: He took unprecedented steps — many of them increasingly at odds with the Bush administration's laissez-faire economic philosophy — throughout the turbulent year.

In March, the Fed began emergency lending to investment banks that it didn't regulate, later expanding to a wider range of Wall Street players. In a failed bid to arrest declining home prices, the Fed also began buying the complex mortgage bonds that investors didn't want. No wonder: The bonds were backed by bundles of mortgages whose risk was impossible to assess.

McClatchy Newspapers 2008
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