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    Posted September 26, 2008 by
    georgemarvin
    Location
    Atlanta, Georgia
    Assignment
    Assignment
    This iReport is part of an assignment:
    Your business: Is the financial crisis hitting home?

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    Bank failures: Then and now, apples to apples

     

    I've heard a lot of journalists talking about the "fact" that 9,000 banks failed during the Great Depression, but there have only been a dozen this year, so our banking industry isn't doing nearly as badly as it was back then.  Well, there are a few problems with those stats.  You have to compare apples to apples.

     

    First, before the Great Depression, there were 25,568 banks in the country.  Many of them were mom and pop operations with just one office.  While the number of banks was reduced from that level to only 14,771 banks in 1933, a total of 10,797 banks lost, the demise of majority of them happened the same way that it is happening now:  The stronger ones are taking over the weaker ones for a few cents on the dollar.  There were a TOTAL of 2,489 actual bank failures during the entire Great Depression, as would be defined by the period in which the economy was in recession (late 1929-1933.  The economy actually grew by over 10% in 1934, as unemployment dropped and the recovery began.  The number of bank failures was miniscule for the rest of the 1930s.) That is an average of 622 bank failures per year at the worst of the depression.  To put that into perspective, there were 924 bank failures in 1926, and 636 bank failures in 1927, at the height of the Roaring 20s.  The banks that failed back then were mostly small banks, with fewer than a dozen employees.  The TOTAL deposits of all of the banks that failed from January, 1921 through december, 1933 was $5.3 billion.  The total loss to all depositors was $1.1 billion after the banks were liquidated.  According to the CPI, that would be about $86 billion in deposits and $18 billion that the depositors lost due to the liquidations of the banks.

     

     

    On the other hand, WAMU by itself had 3,150 branches, about the same number as all of the banks that failed during the Great Depression, combined, and over 43,000 employees, more than the entire number that were unemployed by all of the bank failures of the Great Depression combined.  Likewise, it held almost as many mortgages as all of the banks that failed during the Great Depression, combined.  The one bank had $309 billion in assets, FOUR TIMES THE TOTAL OF ALL OF THE BANKS THAT FAILED DURING THE ENTIRE GREAT DEPRESSION!  If there had not been a buyer for its assets, the depositors who were not covered by FDIC insurance may have lost as much as the final losses of every customer of every bank that failed during the entire great depression, combined.

     

     

     

     

    Of course, I don't like the CPI numbers, since they have been compromised for political reasons.  However, even using more realistic numbers, its failure was equivalent in size to those of every bank that  failed during the entire Great Depression. 

     

     

     

     

    In another large failure earlier this year, the people with deposits over $100,000 in Indymac lost hundreds of millions of dollars.

     

     

     

     

    In other words, when we look at the situation dollar for dollar, apple for apple, we're screwed.  I hope the Fed is able to do something to save the remainder of the financial system before we have a melt down that will make the Great Depression look like a little bump in the road.

     

     

     

     

    If the FDIC hadn't insured this one bank, the economic impact of its collapse would have been more disastrous to the economy as all of the bank failures during Great Depression combined.

     

     

     

     

    And there are two more titans in the industry who have nearly as much junk paper on their books.

     

     

     

     

    The banking industry has been making a living by eating itself for a long time now; the large banks have been buying up the small banks ever since the Reagan administration.  Back then, there were about 20,000 banks in the U.S.; now , there are a TOTAL of just 7,350 banks. 

     

     

     

     

    During the Great Depression, there were rules that prevented banks from operating in more than one state, or controlling over 10% of the financial assets in that state. No one bank had a large percent of the market; it would have been considered treasonous to allow a few banks to control that much of an industry that was so vitally necessary to both the economic and military health of the country.  At the beginning of this year, just 10 banks controlled over half of all of the financial assets in the U.S.; now, due to mergers, buyouts and bankruptices, it has been reduced to just 5.  The small banks failed during the Great Depression.  This time, they are doing fine.  It is the Goliaths of the industry that are falling, and their demise can crush our economy.

     

     

     

     

    The FDIC gave the people confidence in the banking system, which had been shaken during the Great Depression, when people had to wait for months to get their money out of failed banks. That lack of deposit insurance one of the reasons why it took so long for people to regain their trust in the banking industry. 

     

     

     

     

    But the Fed has eroded the rules that prevented the Great Depression from being much, much worse than it was, by spreading the risk among a lot of small banks, and not allowing a few to become so big that they were "too big to fail", as is the situation today.

     

     

     

     

    By the way, we don't compare apples to applew with the unemployment rate, either.

     

     

     

     

    The broadest measure that we use today is called "U6". 

     

     

     

     

    U6 unemployment is now at 10.8%.  That includes people whose unemployment insurance has run out, and those who have given up looking for work; it is usually higher than the "official" unemployment rate, which only counts those drawing unemployment insurance.

     

     

     

     

    Comparing apples to apples, the much simpler 1933 methodology was just to ask all of the people surveyed whether they were over the age of 14, and whether they had a full-time job.

     

     

     

     

    If you include the people who have given up looking for a job, those who only have part-time jobs, students, people on public assistance programs, etc., the unemployment rate would be about 15% right now.

     

     

     

     

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