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Zuckerman Compares Current 'Financial Crunch' to Great Depression

     Repeated predictions and threats of recession weren’t enough for one prominent magazine editor who claimed things are even worse than that by bringing up the Great Depression.

 

     According to U.S. News &World Report Editor-in-Chief Mort Zuckerman, the United States faces a credit crunch of epic proportions.

 

     “[I] think we are facing the worst financial crunch and crisis since the Great Depression,” Zuckerman said on the January 20 “The McLaughlin Group.”

 

     “You have the entire banking system now that is virtually frozen. And there are, not just this subprime mortgage thing, there are other things called credit default swaps where they will lose as much money, $250 billion on. The banks are frozen. They are not making loans because they have such huge debts that they have to take on to their balance sheets and nobody knows how to deal with that,” he continued.

 

     While the financial sector is seeing problems with tightened credit, Zuckerman’s reference to the Great Depression could lead viewers to think that the economy is heading toward a depression.

 

     The U.S. economy overall does not appear to be headed for another Great Depression. For the last two quarters, gross domestic produce (GDP) has grown at a rate of 3.8 percent in the second quarter of 2007 and 4.9 percent in the third quarter. Fourth-quarter GDP numbers for 2007 will not be released until March. Unemployment in the U.S. is also relatively low at 5 percent.

 

     Lita Epstein, author of “The Complete Idiot’s Guide to the Federal Reserve,” explained how the free flow of credit in the 1920s led to the Great Depression – creating a stock bubble.

 

     “All this reminds me of the roaring 20s when credit was freely available for stock speculation,” Epstein wrote on BloggingStocks.com on January 18. “It was this easy credit mentality that inflated the stock bubble of the 1920s and ultimately led to the stock crash of 1929 and the Great Depression.” 

 

     However, it isn’t a “stock bubble” economists are blaming for this credit freeze this time – a very important distinction when evoking the memory of the Great Depression.

 

     There are credible experts who believe we’re not destined for a recession this year, much less a depression.

 

     Recent reports in The Wall Street Journal and Bloomberg said economists think the likelihood of a recession in 2008 is less than 50 percent. The Wall Street Journal reported economists thought the economy had a 42-percent chance of experiencing a recession, and the Bloomberg survey of economists put the likelihood of a recession at only 40 percent.

 

     Even the somewhat gloomy forecast from Goldman Sachs (NYSE:GS), a Wall Street investment bank that has avoided the worst of the subprime mortgage losses, said on January 9 the recession they are predicting would be brief – certainly a far cry from a depression.

 

     “One silver lining is that the recession is likely to be relatively mild by historical standards, with a cumulative contraction in real gross domestic product of only about 0.5%,” said a Dow Jones report about Goldman Sach’s prediction. “And the economy will eventually walk out of the recession and gradually recover in the course of 2009.”

 

     Despite that, strong bearish opinions on the economy as well as parallels to the Great Depression have been cropping up recently in media reports including a January 16 “CBS Evening News” story. That night CBS correspondent Anthony Mason compared problems in the financial sector to banking problems around the Great Depression. 

     These references have been cropping up for years. Back in 2006, ABC, CBS and NBC referenced the Great Depression or recession 49 times, even with strong economic signs that included 1.36 million new jobs and a 12,000 Dow record.