Banks Failures: The 1920’s and The Great Depression

From the FDIC (Federal Deposit Insurance Corp.) itself, a great brief history of banking failures in the 1920’s and the Great Depression.  see:  FDIC: Managing the Crisis: The FDIC and RTC Experience.

On average, more than 600 banks failed each year between 1921 and 1929. Those failures led to the end of many state deposit insurance programs. The failed banks were primarily small, rural banks, and people in metropolitan areas were generally unconcerned. Investors and other businessmen thought that the failing institutions were weak and badly managed and that those failures served to strengthen the banking system. A major wave of bank failures during the last few months of 1930 triggered widespread attempts to convert deposits to cash. Confidence in the banking system began to erode, and bank runs became more common. In all, 1,350 banks suspended operations during 1930. Some simply closed their doors due to financial difficulties, while others were placed into receivership.

To begin to understand both the severity of the crisis and the impact it had on everyday Americans, it is necessary to try to come to grips with its magnitude.  In the four years of 1930-1933 alone, nearly 10,000 banks failed or were suspended.  These banks held deposits of over $6.8 billion (equivalent to perhaps $60 billion today’s dollars, but representing a much larger share of depositor’s wealth then).  The depositors in these banks lost nearly 20% of these deposits when the banks failed.  Since there was no FDIC yet, and most state deposit insurance schemes had shut down already, this meant that everyday folks lost their savings, their money.  Imagine that impact.  You’ve worked hard. Saved money to buy a house on one of those shiny new Ford Model A’s or a Chevrolet.  Then one day, your money is just gone.  Disappeared.  It’s a life-changing event for many of those depositors. But then consider that the monies lost by these unfortunate bank customers represented (over the 4 years) approximately 4% of ALL DEPOSITS at ALL BANKS.  Even those fortunate (or lucky) enough to have their money in a sound bank would be scared.  Were they next?  With the Hoover administration and The Federal Reserve seemingly doing nothing to slow the accelerating trend of bank failures, it is no wonder that FDR won a landslide election in 1932 and that a bank holiday and bank reforms were job #1 of his New Deal.

Details in the table after the Continue reading

U.S. Bank Failures Exceed 100 for Year, First Time Since 1992 – Bloomberg.com

via U.S. Bank Failures Exceed 100 for Year, First Time Since 1992 – Bloomberg.com.

Oct. 24 (Bloomberg) — U.S. regulators closed more than 100 banks in a single year for the first time since 1992, signaling the financial crisis hasn’t abated for lenders struggling with mounting losses tied to commercial real estate.

Seven banks — three in Florida and one each in Georgia, Wisconsin, Minnesota and Illinois — were shut yesterday, according to the Federal Deposit Insurance Corp., pushing this year’s total to 106. That’s the most since the savings-and-loan crisis led regulators to shutter 179 institutions in 1992.

“It’s very painful, it costs a lot of money, it ruins careers,” said Gerard Cassidy, an RBC Capital Markets analyst in Portland, Maine. “But shutting down failed banks and writing off the bad loans is a necessary solution that has to be done to get the economy and the banking system back on its feet.”

Is The American Dream A Myth?

via National Journal Magazine – Is The American Dream A Myth?.

In the generation after World War II, the median income roughly doubled, increasing faster for those on the lower rungs of the ladder than for those at the top. Since 1979, the median income has advanced much more slowly overall, and it has grown much faster for the affluent than for those below them. Today, Haskins and Sawhill note, family incomes are higher than in the 1970s almost entirely because women are working, and earning, more than they did then; men in their 30s today earn less than their fathers did at the same age.

In this environment, upward mobility becomes tougher. Analyzing long-term economic studies, the authors found that millions of Americans eventually outearn their parents, no matter where they start out. But the pair’s calculations also show more continuity than our national myths imply.

More than 60 percent of Americans whose parents scaled the top fifth of the income ladder have reached the top two-fifths themselves, Haskins and Sawhill found. By contrast, 65 percent of Americans with parents from the lowest fifth of earners remain stuck in the bottom two-fifths. Though we venerate the American Dream, studies show that children born to low-income parents in the United States are more likely to remain trapped near the bottom than their counterparts in Europe, the authors report.

And this via inside.org.au/american-dreams/

But the mobility myth is so widely believed and so deep-seated that it’s not surprising he [Obama] hasn’t tried to confront the problem head on. When the Economic Mobility Project surveyed 2100 adults and ran ten focus groups earlier this year it found that respondents overwhelmingly believe that personal attributes – “like hard work and drive” – are the prime determinants of how economically successful an individual can be. A smaller majority also disagreed with the statement that “In the United States, a child’s chances of achieving financial success is tied to the income of his or her parent.”As the studies show, that statement is true for most children in the United States, and for a higher proportion of American children than in most comparable countries. Among the twelve countries analysed by d’Addio in her 2007 report, Intergenerational Transmission of Disadvantage: Mobility or Immobility across Generations?, the United States was in a group of four – with France, Italy and Britain – where family background plays the greatest role in influencing adult income. Children born into a poor family in any of these countries had a much lower chance of breaking into a higher income group than in any of the other countries in the study. (For historical and data-related reasons, most evidence used in these studies relates to the earnings of sons compared to their fathers.)

Britain came out worst, with around 50 per cent of a person’s income explained by his or her parents’ income. In other words, Britain was halfway between a situation in which there is no statistical relationship between a son’s income and that of his father and a situation in which his income is statistically identical to his father’s income. (The lower the percentage, the greater the mobility.) Italy and the United States weren’t far behind, at around 47 per cent. At the other end of the range were Denmark, Norway, Finland and Canada, where parental income explained less than 20 per cent of the child’s eventual earnings. If these figures are correct – and they’re generally accepted as being broadly accurate – then it’s those four countries, rather than the United States, that come closest to realising the American Dream.

Some studies have found that mobility is not only limited in the United States but has worsened in recent decades. A report for the Future of Children project, a collaboration of the Woodrow Wilson School and the Brookings Institution, found that “occupational mobility” – the measure favoured by sociologists – increased during the 1970s but reverted to the levels of the 1940s–60s during the two subsequent decades.

To learn from history, first listen to those who lived it / made it/ studied it. – Interview w/ Samuelson

Paul Samuelson is one of the great economists of the 20th century.  He was one of the first ones awarded the Nobel Memorial Prize.  His textbook on Principles was the standard text for at least 40 years and the model for all others.  He speaks in a two-part interview on the current economic crisis, the crisis in macro theory today, and even a few comments about modern textbooks.

An Interview With Paul Samuelson, Part One

An Interview With Paul Samuelson, Part Two

Interesting supplements to this interview are the summary of the history of modern macro theory by Krugman (I have post about it here) and a short history of macro and crises by Brad deLong (I have a post here.).

Supply Side Arguments for Tax Cuts for the Rich Ignore both Theory and Evidence

One of the political-economic legacies of the late 1970’s and early 1980’s was a belief in  supply-side theories of tax cuts as an “engine of growth”.   Republicans have claimed this as  a legacy from Ronald Reagan.  In fact, however, the cutting of top marginal income tax rates was started by Jimmy Carter.  Under Carter’s administration the top marginal tax rate (MTR) was reduced from 70% to 50%.   Under the first of the Reagan cuts, the top MTR was cut further to 38%, and then later to 33%.  The claim had been (and still is by some) that reducing the MTR’s improves the incentives to work resulting in more people working harder & longer & making more income (thus more GDP).  The inverse has also been argued as a reason why MTR’s can never be increased, particularly on upper-income brackets.

This logic, carried to an extreme under the Bush II administration brought us the first attempts to fight two major (in $ terms) wars and finance them with tax cuts instead of taxes.  It hasn’t worked.  Part of the reason is because such supply-siders ignore part of the logic and theory of why people work.  Yes, higher tax rates reduce my incentive to work longer because they reduce the take-home pay rate I get for longer hours.  But the lower income also motivates me to work longer and harder to maintain the same absolute dollar income.   Theory is indeterminant about which effect dominates.  However, experience is not indeterminant.   MTR’s as incentive mechanisms are very weak.

Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. In their familiar rhetorical flourish, they insist that a more progressive tax system would kill the geese that lay the golden eggs. On close examination, however, this claim is supported neither by economic theory nor by empirical evidence.

The surface plausibility of trickle-down theory owes much to the fact that it appears to follow from the time-honored belief that people respond to incentives. Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less, as trickle-down theorists claim. As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.

If economic theory is unkind to trickle-down proponents, the lessons of experience are downright brutal. If lower real wages induce people to work shorter hours, then the opposite should be true when real wages increase. According to trickle-down theory, then, the cumulative effect of the last century’s sharp rise in real wages should have been a significant increase in hours worked. In fact, however, the workweek is much shorter now than in 1900.

via In the Real World of Work and Wages, Trickle-Down Theories Don’t Hold Up – New York Times.

One implication is that the U.S. could raise MTR’s on upper income taxpayers without slowing growth.  In particular, a top candidate should be hedge fund managers and other Wall St. traders that use loopholes introduced in 2001 to pay a lower tax rate than on their high six and seven-figure incomes than someone earning $60,000 pays on theirs.   This could go a  long way to paying for universal healthcare, reducing the long-term structural deficit, and even paying for those wars Washington just can’t seem to let go of.

Countries-with-the-biggest-gaps-between-rich-and-poor

One of the ways economists measure income distribution is through the use of “Gini coefficient”. The Gini coefficient measures relative income distribution on  a scale of 0-100.   A Gini of 100 means 1 person has all of the income in a country and everybody else has zero.  A Gini of  zero means everybody in the country gets exactly the same income.

The U.N. Development Program recently came out with a report looking, among other things, at income inequality worldwide.More from BusinessWeek.com:• A Rebound for China and India’s Millionaires• World’s Best and Worst Property Markets• The World’s Best Places to Live 2009The UNDP ranked countries and regions based on a number of factors, including their Gini coefficient, named for Italian statistician Corrado Gini.

The U.S. has a very unequal distribution of income with a Gini of 40.8.  That makes the U.S. the 3rd most unequal distribution among advanced economies, with only Hong Kong and Singapore being more unequal.    via:  Business Week/ Yahoo News