If a 2008 depression followed the pattern of the 1929 one, there would initially be little difference between what actually happened and the Great Depression scenario. The pattern would be a nasty, but seemingly controlled recession that gradually deepened for about two years, with apparent signs of recovery.
At that point you would start to see the weakest European Central banks fold. The stronger European Central Banks would try to bail them out, but fail, with each failure weakening the stronger European economies. In about three years most of the European Central banks would be on the verge of collapse. The crisis of confidence in the banking system over there would reflect back to the US and force healthy banks to pull in loans to healthy businesses because they would be afraid of runs on the bank and would need liquidity. With businesses hurting, the US would go the protectionist route, and everyone else would follow suit. Voila, Great Depression, with things really getting bad two to three years after the 2008 crash.
Of course a 2008 depression wouldn't take exactly the same form. Unemployment insurance and two-earner families would buffer us, keeping demand higher than it would otherwise be. So would safety-net programs--food-stamps and the like. So, for a while, would the higher percentage of people in state, local and federal jobs. There wouldn't be as much chance of runs on the banks by small investors because of deposit insurance. And the experience of the last depression would influence the Fed. Even without TARP, etc, the Fed would pump liquidity into the system and push interest rates to near zero which theoretically should revive the economy.
That last paragraph seems to be saying that another depression is impossible. I'm not saying that. I am saying that it would probably take longer than three years from the initial crash to hit the deep phase because of the various buffers and that it would take a deep failure of monetary policy to cause things to get that bad. Monetary policy isn't always a panacea though. The Fed can push interest rates to effectively zero, but that doesn't mean banks are going to loan to people who are unemployed, are underwater on their house, or have $150,000 in student loans or credit card debts and are working at WalMart. Get a high enough percentage of people in those classes and loans won't happen to them pretty much no matter how much liquidity is in the system.
Low interest rates can actually create downward pressure on the economy in some ways because it means that people nearing retirement aren't earning as much on their existing savings and have to put away more to have the savings they need for retirement. States and localities have to spend more on their pension funds because the money they have in the funds is earning less. That additional money going into pensions means cuts in other services, which means state and local employees get cut back and/or taxes get raised, which in turn depresses the economy.
If the crash happened in 2008, the full impact of it might not be felt for four or five years. For those years it might look like a worse than normal recession. Then it would spin out of control because of something no one anticipates and in this alternate reality we would face the 'joy' of another Depression.
At that point you would start to see the weakest European Central banks fold. The stronger European Central Banks would try to bail them out, but fail, with each failure weakening the stronger European economies. In about three years most of the European Central banks would be on the verge of collapse. The crisis of confidence in the banking system over there would reflect back to the US and force healthy banks to pull in loans to healthy businesses because they would be afraid of runs on the bank and would need liquidity. With businesses hurting, the US would go the protectionist route, and everyone else would follow suit. Voila, Great Depression, with things really getting bad two to three years after the 2008 crash.
Of course a 2008 depression wouldn't take exactly the same form. Unemployment insurance and two-earner families would buffer us, keeping demand higher than it would otherwise be. So would safety-net programs--food-stamps and the like. So, for a while, would the higher percentage of people in state, local and federal jobs. There wouldn't be as much chance of runs on the banks by small investors because of deposit insurance. And the experience of the last depression would influence the Fed. Even without TARP, etc, the Fed would pump liquidity into the system and push interest rates to near zero which theoretically should revive the economy.
That last paragraph seems to be saying that another depression is impossible. I'm not saying that. I am saying that it would probably take longer than three years from the initial crash to hit the deep phase because of the various buffers and that it would take a deep failure of monetary policy to cause things to get that bad. Monetary policy isn't always a panacea though. The Fed can push interest rates to effectively zero, but that doesn't mean banks are going to loan to people who are unemployed, are underwater on their house, or have $150,000 in student loans or credit card debts and are working at WalMart. Get a high enough percentage of people in those classes and loans won't happen to them pretty much no matter how much liquidity is in the system.
Low interest rates can actually create downward pressure on the economy in some ways because it means that people nearing retirement aren't earning as much on their existing savings and have to put away more to have the savings they need for retirement. States and localities have to spend more on their pension funds because the money they have in the funds is earning less. That additional money going into pensions means cuts in other services, which means state and local employees get cut back and/or taxes get raised, which in turn depresses the economy.
If the crash happened in 2008, the full impact of it might not be felt for four or five years. For those years it might look like a worse than normal recession. Then it would spin out of control because of something no one anticipates and in this alternate reality we would face the 'joy' of another Depression.