They say history repeats itself, but usually not this quick. The United States is in going through a huge banking collapse not seen since the banking collapse that gave rise to the Great Depression.
In 1929, the good times in the United States came to an end. After years of tremendous personal financial wealth gains, the market corrected. This resulted in rumors of banking problems and a run on the banks that resulted in the collapse of the industry.
The Great Depression was nothing less than a brutal period in world history. Not only did the United States go through 10 years of misery, but the world did since the ties to the US economy were strong enough to create a cause and effect situation.
How did we get out of the Great Depression? The government put many different social programs in place to create jobs. These programs certainly deserve credit, but things really did not turn around until the massive output needed for World War II.
Does all this sound a little familiar? It should. The only difference is the Great Depression was fueled by stock market gains, while we have seen housing market gains. We all hope, of course, that a World War is not necessary as well.
Lehman Brothers in bankruptcy. AIG, Freddie Mac and Fannie Mae saved by the government. Merrill Lynch going for a song to Bank of America. Washington Mutual nearly failing. Is there any doubt the banking industry is a nightmare.
Many have put faith in the fact only Lehmans actually went bankrupt. Well, this is a mistake. The others were only saved from bankruptcy by the government or a company, Bank of America, getting a great deal.
So, why are we not in the second Great Depression given all the bad news? Well, we may end up there, but so far we are being saved by Ben Bernanke and the Federal Reserve. Mr. Bernanke should get the highest award possible if we survive this mess.
In 1929, the Federal Reserve was neither particularly strong nor prepared for the massive rush on banks. To the extent that is was involved in the banking process, it failed in its role. Well, not this time.
The Federal Reserve is the bank of last resort. It lends money to banks and keeps liquidity in the market. Well, it has been doing this and more. Combined with the government, it has pumped over 900 billion dollars into the market.
The current situation is unique. Banks are failing right and left, yet nobody says much. Why? The Fed is coming taking them over and selling them over the weekend when the news reporting is none existent. Pretty slick, eh?
Will we survive the current banking mess? It is really difficult to tell. If we do, it will primarily be the result of the Federal Reserve and Ben Bernanke.
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