John Paul Rossi

John Paul Rossi is an associate professor of history at Penn State Erie, The Behrend College. He is co-author of "Entrepreneurship and Innovation in Automobile Insurance" and is a writer for the History News Service.

Articles by this Author

Another Great Depression?

By John Paul Rossi
Published 01/4/2009
Business News
Rating: Unrated

By John Paul Rossi
History News Service

The United States is in the midst of the worst financial crisis since the Great Depression. The question is: How close are we to another Great Depression?

The answer is: Very close. Here's why.

The Great Depression was the result of the combination of the 1929 financial crisis and serious structural problems in the American economy such as widespread poverty. After the 1929 stock market collapse these factors cut deeply into business investment and personal consumption. The consequence was a downward spiral that created the worst economic collapse in American history.


Today's economy is hurtling downward on a similar path. The mortgage and financial crises have constricted credit and largely cut off business investment. Stagnant wages and over-borrowing have curtailed consumer spending. The collapse of a stock market bubble in 1929 triggered the chain of events that led to depression. When stock prices fell in October 1929, investors, financial institutions and banks were caught overextended. The fall in stock prices produced a financial panic that bankrupted many. To repair damaged balance sheets, surviving banks and financiers dramatically reduced lending. The result was a long and steep decline in economic activity.

Much as in 1929, the 2008 collapse has been the consequence of a speculatory bubble, this time in real estate. It was pumped up by over-lending by banks and financial companies and over-borrowing by Wall Street.
Rising interest rates helped burst the bubble. Subsequent property owner defaults caught investors, financiers and businesses holding mortgages, or investments based on them, short. Enormous losses for investment firms and banks followed. Despite government bailouts and aid, the country's surviving major banks have severely cut lending. The 1920s stock market bubble hid serious structural problems in the underlying economy. The same is true for the real estate bubble in the 2000s.