Current Economic Turmoil: Have We Been Here Before?

An archived newspaper article from the Seattle Times begins with the following gloomy headline: “Bank Crisis Risks Turning Recession Into Depression.” You’ve probably heard similar worries recently, both on the news and around the water cooler at work. The article starts with a warning from an editorial in Business Week that says, “The banking system is under tremendous strain. Should it begin to unravel, recession could easily become an economic disaster.”

Why is this important enough to write a post about when you’ve been hearing it for the past several months? Because this article was published on December 16, 1990! So what else was happening more than 18 years ago that raises familiar concerns?

-  More than 1,000 banks are on the Federal Deposit Insurance Corp.’s problem list – four times as many as the last time the U.S. economy entered recession.

-  The emerging recession is driving loan defaults up and bank profits down.

- Stock values of the biggest U.S. banks, such as Citicorp and Chase Manhattan, have plummeted 50 percent since July.

- To shore up profits, banks are cutting back personal loans even to credit-worthy businesses, shrinking the already-slowing economy.

Is there anything here that couldn’t have been written in the last few months? The same issues that we’re battling right now were rearing their ugly heads less than 20 years ago!

What can we learn from this? I think the main lesson is that while the banking industry is under a tremendous amount of pressure right now, it’s not like this is the first time when bank failures and tight credit conditions have been a major problem. It’s certainly not the first time that it has felt like the sky was falling economically.

A bigger lesson might come in the realization that although things were hard in the early 90’s, we recovered. Yes, there might be more pressure on the economy today than there was 20 years ago. But in every economic storm in this nation’s history, we have emerged from it stronger than we were before. It could get worse before it gets better, but there is plenty of reason to hope and believe that things will get better.

The last few days have actually provided some signs of hope for this economy. The stock market is riding a 3 day winning streak after going more than 5 weeks without 2 positive days in a row. Citigroup revealed that they are operating at a handsome profit so far in 2009. Banks are getting help from lawmakers working to value the assets on their balance sheets more accurately.

History is an outstanding teacher. Hopefully the lessons we have learned in past recessions will help us to emerge from this one more quickly and recovery can begin. With spring right around the corner, there are sunnier days on the horizon for our economy too.

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