9. Similarities between the 2007 Recession and the Great Depression

“A nationally planned economy is the only salvation of our present situation and the only hope for the future.”

-Donald Richberg, member of the Roosevelt Administration

The Great Depression is a decade of human misery and economic decline that affected all social classes from the poor to the rich [1]. It started in 1929 and lasted 11 years. The unemployment rate peaked at 26% [2], poverty was wide spread, and shanty towns sprang up along the landscape. The homeless scrounged crates, cans, and auto parts and constructed shanty towns on vacant lots and under bridges. The shanty towns had no water, electricity, and other utilities [3]. Everyone blamed President Hoover and called these shanty towns Hoovervilles. People roamed from state to state, searching for work [4]. Breadlines stretched around street corners and some people were committing crimes, so they could receive room and board at the jail [5].

Many economists do not know what started the Great Depression and why it lasted so long, because a recession usually lasts anywhere from one to two years. The purpose of this chapter is to note the similarities and differences between the Great Depression and the current 2007 Recession, because the Great Depression started as a mild recession and gradually became worse. It is possible the U.S. will not leave the 2007 Recession and may be the prelude to the Second Great Depression.

The Prosperous 1920s

Before the start of the Great Depression, the United States grew significantly and the 1920s were known as the Era of Prosperity. Family incomes significantly rose and living standards improved for all Americans. The 1920s are considered one of the most prosperous eras in American history.

During the 1920s, American consumers garnered enough wealth to purchase a new product that changed the American landscape: the car. With more wealth coupled with mass production technology, the prices of cars fell, causing demand for cars to surge. The number of cars registered jumped from 9 million to 23 million during the 1920s. With more cars on the road, other industries related to cars expanded. Government had to pave roads, build bridges, and install signs and traffic lights and businesses built gas stations, auto parts stores, repair garages, and car dealerships [6]. The automobile industry had a significant impact on the U.S. economy during the 1920s. Imagine all the jobs, wealth, and industries that were created from the introduction of cars.

The 1920s also saw large amounts of investments in homes, commercial real estate, and consumer products. Families wanted to escape the confines and stress of the city and they began migrating to the suburbs. Mortgage financing was pivotal for this migration, because it allowed the financing for a family to buy a house [7]. Of course, every family wanted all the new electronic devices like radios, cooking devices, vacuum cleaners, washers, dryers, and other appliances [8]. Finance companies were pivotal in helping families finance these consumer products [9]. Finally, large corporations wanted to show their power and financial position by investing in large office buildings. One famous landmark was the construction of the Empire State Building during the 1920s [7].

During the prosperous 1920s, everyone economically benefited, but everyone did not share the benefits equally. With a strong manufacturing sector, the 1920s saw the rise of skilled and unskilled labor with the skilled labor earning higher wages than the unskilled. Towards the end of the 1920s, the richest people in the United States also saw the largest increase in wealth. The wealth of the top 1% of the richest people in the United States saw their wealth increase from 32% to 38%. The overvalued stock market helped to contribute to high salaries for CEOs. The 1920s saw the “highest income inequalities in American history” [10].

Morality appeared to be declining during the 1920s. The new wealth pouring in from the stock market allowed people to party more. The divorce rate in America reached the highest level in its history during the 1920s. There was one divorce out of every 6 marriages [11].

As the economy was growing, and creating jobs and wealth, American families and corporations accumulated debt with no problems. The real problem rose, when incomes and wealth started to fall. The stock market crashed, wiping out tons of paper wealth, and not too far behind, real estate prices collapsed as the real estate bubble bursts. At the end of the 1920s, developers over produced the number of housing plots in the suburbs [7].

The 1920s were prosperous times and unfortunately, as Newton's Law of Gravity states; what goes up must eventually come down. The prosperous 1920s came to an explosive close like a shotgun blast on a deadly still, cold night. The Great Depression began with the stock market crash in 1929.

Stock Market Crash of 1929

The stock market rose dramatically during the 1920s. The stock prices were rising so fast that rumors were circulating that shoeshine boys and waitresses became millionaires by investing their meager tips into the stock market [12]. During 1927, the Federal Reserve and President Hoover tried to slow down the rapidly increasing stock prices by increasing the interest rates. They believed the market was over valued and they wanted to prevent a stock market bubble [13, 14]. Of course, some believe the U.S. government and Federal Reserve did not want gold to leave the United States, because our country was on the gold standard. A higher interest rate would encourage international investors to keep their money in the U.S. economy and not cash in dollars for gold. However, the Federal Reserve’s actions had little impact. The stock market had a bumpy ride during October and eventually crashed on October 29, 1929, which is known infamously as “Black Tuesday” [15]. On that infamous day, investors traded 16 million shares on the New York Stock Exchange, accumulating losses in the billions. The stock market had a deep psychological impact on the country and many viewed the crash as a blow to a strong U.S. economy [15].

With the stock market crash in 1929, corporate corruption and excessive greed rose to the surface. The U.S. government passed laws requiring corporations to disclose more information to stockholders and President Roosevelt created the Securities Exchange Commission to police the stock markets. New laws made it illegal for insider trading and bear raids. A bear raid is where an investor borrows a security and hopes to buy it for a lower price [16].

Many similarities exist between the Stock Market Crash of 1929 and the stock market decline in October 2008. Technically, the stock market did not crash in 2008, but stock prices have significantly declined in value. The Dow Jones peaked approximately at 14,000 and bottomed out around 7,000. This is a 50% percent decline in value and this severe drop has repercussions throughout the economy. The impacts of declining stock prices on the U.S. economy are:

People and businesses that are holding stock see their paper wealth dissipate in the air like smoke. As their paper wealth dissipates, people and businesses reduce their consumption, especially in luxury goods. It is no coincidence that the travel industry, durable goods like cars, and business investment have taken massive hits from the 2007 Recession.
Working people invest their pension plans in to the financial markets. With massive losses in the financial markets, many people on the verge of retirement are delaying their retirement plans. Further, people may keep their money out of the stock market and hide it under their mattress.

The Banking System

At the beginning of the Great Depression, government delayed the liquidation of bad business loans and encouraged financial institutions to keep lending to businesses, even to businesses that should have not received any investment [17]. The government wanted to keep investment spending high, which could help the stock market rebound.

The Federal Reserve stood by and allowed a large number of banks to fail during the Great Depression. However, most people do not realize the United States was on the gold standard. The Fed could not increase the money supply or provide emergency loans to banks because it did not have enough gold. The exchange rate between gold and U.S. dollars were fixed at 1 ounce = $20. Further, people lost their faith in the banking system and transferred their money into gold. People withdrew gold from the Federal Reserve and hoarded it. In 1933, President Roosevelt stopped this trend by declaring the holding of gold illegal and the United States left the gold standard. Currently, the United States is not on the gold standard. The Federal Reserve can issue as much money or grant as many loans as its wants.

Interest rates tend to tumble to historical low levels during severe economic contractions. The Federal Reserve discount rate dropped from 4.5% to 1.5% during the Great Depression [18]. The discount rate is the interest rate the Federal Reserve charges financial institutions for loans. Similarly, the Federal Reserve discount rate took a similar nosedive during the 2007 Recession as the discount rate dropped to 0.5% in December 2008 [19]. Usually interest rates move together. As the discount rate falls, other interest rates fall. This is great news for borrowers, because their loans are cheaper. However, this is bad news for lenders and investors. They earn less interest income and their profits and incomes are smaller. However, the problem with low interest rates signals two worrisome problems for the 2007 Recession:

The Federal Reserve System is injecting massive amounts of money into the banking system. The sad news is the U.S. economy is still shedding jobs, and foreclosures and bankruptcies are still climbing. Moreover, the Federal Reserve has granted over $2 trillion in emergency loans to financial institutions. The Federal Reserve does not disclose which banks are getting loans, believing depositors and investors will panic if they discover their bank is in financial trouble.
Lower interest rates may not spur economic development. Two factors are occurring. First, Americans are all loaned out. Americans are having trouble paying back their current debt, so why add more to it. Second, house and car prices are falling. It would be foolish to get loans on assets that are losing value. Borrowers should wait until the prices hit bottom before taking on new loans. Also, banks may not want to grant loans on assets that have falling prices.

Deflation

During the Great Depression, the U.S. experienced a sharp deflation [20]. Deflation is when prices in the economy are falling and is considered a two-edged sword. On the one hand, falling prices benefit consumers. Consumers can buy more products, when they are cheaper. On the other hand, deflation is very dangerous to an economy, because lower prices squeeze business profits. A business cannot survive if it cannot earn a profit, so a business will try to lower its costs. A business can only lower costs in three ways.

Businesses adopt new technology that increases efficiency, so businesses could produce more with the same resources. Usually businesses do not invest during downturns in the economy. The future is uncertain, profits tend to fall, and it is better to save money than to invest in new technology.
The largest cost to a business is labor, so a business will try to lower wage rates or lay off workers. If workers are laid off, then workers have less income to buy goods and services, which cause the economy to contract. This is a bad trend for the U.S. consumer economy.
The business re-locates to places that have cheaper operating costs. In our case, that would be China. Unfortunately, the business creates jobs and wealth in China and not here within the United States. This is another bad trend for the U.S. manufacturing economy.

During the Great Depression, severe deflation led to massive layoffs and a significant drop in production. The production of durable goods fell by 50%, nondurable goods fell by 20%, and retail sales dropped by 25% [21]. Currently the United States is experiencing a mild deflation and it appears businesses are not absorbing the lower prices through adoption of new technology. Moreover, retailers are reporting disappointing sales for 2008 Christmas, and Chrysler and GM filed for bankruptcy in 2009. In addition, many companies are leaving the United States and opening new factories in foreign countries like China and these Chinese products will be exported to the United States. With companies leaving the United States, this creates less jobs and lower incomes for the American people. Incidentally, the tax base is lower, so people pay less taxes to government. It is no coincidence that many state and local governments are going broke in the United States.

The government tried to help businesses by using trade barriers to stop deflation during the Great Depression. In 1930, the government passed the Smoot-Hawley tariff, which protected U.S. agriculture and manufacturing industries from international competition. The government wanted to “build up the domestic industry,” because with less competition, businesses can increase prices [21]. With higher prices, the businesses and farmers can earn profits. Businesses could use some of these profits to pay the stockholders of corporations, which would help the stock market. Further, businesses could use some of the profits to pay higher wages to the workers. Further, an infusion of profits to the farmers would slow down the large number of farmer bankruptcies and farm foreclosures. However, the tariffs backfired. The trading partners with the United States also passed similar tariffs, causing international trade to collapse. It is unclear how many farmers and domestic businesses benefited from the tariffs, but the loss of the export industry led to more unemployment and income losses. Currently, the U.S. has not passed any wide sweeping trade restrictions for the 2007 Recession, but the government can impose more bureaucratic red tape to slow down imports. For example, some Chinese dairy products were tainted with melamine. Thus, the U.S. government stopped Chinese dairy imports for safety reasons. Similarly, the European Union is trying to stop U.S. beef imports, because the U.S. beef industry uses a variety of growth hormones. Europe is citing health concerns relating to the hormones.

Farmers

The U.S. farmers were the hardest hit during the Great Depression. Before the stock market crash, farmers were already hit with declining agricultural prices. With prices plunging and a severe drought in the Midwest, farmers were driven from their lands through bankruptcies and foreclosures. Some farmers gathered arms and became militant, while other farmers fled to states like California in search of work [23].

The U.S. government responded to falling agricultural prices by interfering with the agricultural markets. Government can use two techniques to increase farmers’ incomes. First, government encourages farm exports, thus supplying international consumers. More consumers mean higher prices. Unfortunately, during the Great Depression, the U.S. government destroyed free trade. Second, government increases farmers’ incomes by increasing prices of agricultural products, subsidizing cheap credit to farmers, or subsidizing farm cooperatives [24]. A cooperative is an organization that unifies the farmers into one supplier and one supplier can act like a monopoly, increasing the selling price. (Usually monopolies are considered bad, except the ones supported by government).

During the Great Depression, the President Hoover allowed the U.S. government to intervene heavily in the butter, cotton, grape, wheat, and wool markets, but the market price of these commodities continued to fall [25]. When President Roosevelt came into power, he took government control one more step. The government set production quotas on corn, cotton, dairy products, hogs, rice, tobacco, and wheat. The U.S. government paid subsidies to farmers to allow their land to remain idle. If farmers produced too much, then the government would buy the excess and destroy it. This aggressive government intervention allowed farm incomes to increase. However, food prices became more expensive to consumers. Unfortunately, as some people were starving, the U.S. government was destroying food.

The U.S. government still uses these price controls. The controls are still ineffective, because agricultural prices have been falling since the 1990s. Economists usually consider price controls ineffective, because an artificial high price causes farmers to supply more. As the supply increases, the market price falls. Then government enters the ridiculous situation, where it stock piles a massive amount of agricultural products or ends up destroying it, in order to bring the supply back down. Since the start of the 2007 Recession, many agricultural prices are still falling. Further, some farmers did not receive payment for commodities that were shipped in 2008, because those companies went bankrupt.

Employment

During the Great Depression, more and more people became unemployment over time, peaking at 26% in 1932. With jobs scarce and applicants lining up for one job, the power balance between the employer and employee shifts towards the employer. The employer will decrease wages, increase workloads, increase work hours, and reduce benefits. The employee is powerless, when numerous other applicants are lining up for his job [26]. One particular company literally turned its employees into slaves. The coal fields in Harlan, Kentucky were a harsh place to be during the Great Depression. The coal mining companies owned the miners’ homes and local grocery stores. The companies extracted every penny from the miners by lowering their wages, forcing them to live in the companies’ homes and purchasing groceries at the companies’ stores [27]. The companies literally controlled all the economic affairs of its employees.

Teenagers and children could not find jobs and could not attend school during the Great Depression. State budget problems caused many schools to close their doors. Further, teenagers and children accepted the hobo lifestyle and drifted back and forth across the United States [28].

Discrimination of minorities increased during the Great Depression. With jobs becoming scarce, African-Americans experienced more discrimination and had to pay more money in rent compared to white families. Landlords even rented out rat infested basements and the tenants had to use cans as a toilet. Many African-American families had to rent or share their apartment space with other families to help pay for rent. African-Americans turned to charities and other public relief programs [29].

President Hoover in 1929 encouraged businesses not to lay people off or reduce the wage rates. High wages maintain strong consumer spending [17]. If businesses still employ people, the people retain their purchasing power. People cannot continue to buy houses, cars, appliances, and other goods, if they are laid off or have their wages cut. As a compromise to business, the U.S. government allowed businesses to reduce the workweek and government granted subsidies to them [17]. President Roosevelt took this a step further and tried to boost the number of jobs by creating public works jobs, imposed regulations on businesses, lowered the workweek to 40 hours, and passed child labor laws.

President Obama has not tried to influence businesses in terms of employment. Many corporations are laying off thousands of employees. Massive layoffs have a negative multiplier effect on the economy. These workers will cut back on their purchases on houses, cars, appliances, travel, and other luxury goods. As revenues to these industries decrease, their profits decrease, causing these industries to reduce their work force. This vicious cycle can continue indefinitely. Even workers who are still employed see these jobs losses and become fearful of losing their jobs. Consequently, they also cut back on their spending, adding more misery to a weak U.S. consumer economy.

In 1930, the U.S. government significantly cut the immigration quota by 90%, believing cheap foreign labor caused wages to drop [30]. This argument has pros and cons. If more workers are in the labor market, then wages will fall. However, immigration is a source of talent. Currently the United States stands like a beacon of freedom and many U.S. businesses pay high wages that have attracted talented and educated workers from around the world. Talented and educated workers are the building blocks of high tech industries. After the terrorist attack on the World Trade Center on September 11, 2001, the United States government imposed tougher immigration and visa requirements. The tougher immigration requirements prevent the entry of talented foreigners and less foreigners enter and study in schools and universities in the United States. Turning off the spigot of talent to the United States will hurt the high tech industries. It may even encourage more businesses to leave the United States and enter into foreign countries to tap into their educated and talented workers. Of course, there is the economics of outsourcing. Instead of paying a U.S. engineer $60,000 per year here, a company can hire 10 engineers for the same money in India.

Taxes

At the start of the Great Depression, President Hoover passed tax cuts. The tax cuts were small. Personal income tax rate fell from 5% to 4%, while corporate income tax rate fell from 12% to 11%. The theory behind tax cuts is people and businesses will have more money. When consumers have more money, they spend more, creating higher demands for goods and services. If businesses have more money, they may hire more workers and invest in more machines and equipment. Investment allows businesses to operate more efficiently and produce more goods and services. Consequently, tax cuts should boost a weak economy. At the beginning of the Great Depression, U.S. federal government still had a surplus, but it became smaller after the tax cuts [31].

The federal government began to have budget deficits, as the Great Depression raged on. The severe contraction in manufacturing and the massive number of bankruptcies caused the tax base to erode. In 1931, President Hoover did a complete reversal and passed the largest peacetime tax hike in American history. Hoover instituted new taxes on gas, tires, malt, stock transfers, bank checks, and real estate, including the hated inheritance tax. He also increased the income tax rates [32]. Further, Hoover wanted to stimulate consumption and discourage savings, so the government imposed taxes on investment [17]. When President Roosevelt came into office, he also passed a slew of new taxes. Roosevelt did not want high government debt, but he created numerous government agencies and large, expensive public works projects. Thus, Roosevelt increased income and estate taxes, and imposed an excise tax on almost everything. Some of the excise taxes were on lubricating oil, malt syrup, brewer's wort, tires, toilet articles, furs, jewelry, automobiles, trucks, radio and phonograph equipment, refrigerators, sporting goods, cameras, firearms, matches, candy, chewing gum, soft drinks, and electricity [33]. Here is the kicker! Government imposes an excise tax on a specific good. Thus, each tax has its own rules and tax schedule that businesses have to keep track of. Would it not be simpler to impose a simple sales tax and apply it to everything?

Tax hikes can be disruptive during recessions. If households and businesses are already financially hurting, then increasing taxes will increase the hurt. Unfortunately, the 2007 Recession is causing incomes to fall, foreclosures and bankruptcies are increasing, and several industries are on the verge of collapsing. Many state and local governments are financially hurting. Although President Obama is talking about tax cuts, many state politicians are dreaming up new taxes or expanding old taxes. Thus, the states will nullify the actions of the federal government.

The Growth of Government

President Hoover used the power of the federal government to try to shorten the Great Depression. Hoover asked states to expand state public works programs [34]. These public works programs created jobs for the unemployed workers by building new bridges, roads, and parks. Moreover, the Hoover Dam was also built [5]. When workers have more money, they buy more products, creating again a demand for more goods and services. In addition, the state has more roads, sidewalks, and infrastructure. Franklin

Roosevelt easily won the presidency, because many people blamed the Great Depression on capitalism and excessive greed. He took Hoover’s plan and greatly expanded it. President Roosevelt created numerous government agencies and a slew of new taxes to pay for them. Only the prominent agencies are listed below, because the list is quite long:

Federal National Mortgage Association (i.e. Fannie Mae) – a government agency that grants mortgages to the poor. Many banks collapsed or stopped lending during the Great Depression, Fannie Mae tried to get the housing market growing again by granting mortgages.
Federal Deposits Insurance Corporation (FDIC) – a government institution that insures banks deposits. Deposit insurance helps prevent bank runs. A bank run is all the depositors show up at their bank to withdraw their deposits, because they believe the bank will fail. A bank lends most of its money out and cannot pay all the depositors, when they show up at the same time. Thus, a bank run always causes a bank failure. Deposit insurance gives depositors a belief their deposits are safe. If the bank fails, then FDIC pays the depositors their money.
Federal Bureau of Investigation (FBI) – a government agency that tracks down criminals who violate federal laws. FBI evolved from previous enforcement agencies. During the Great Depression, many people lost their money when their banks failed. Thus, bank robbers like John Dillinger, Baby face Nelson, and Bonnie and Clyde became folk heroes, because they were getting back at the banks. The federal government through FDIC insured bank deposits made bank robbing a federal crime. President Roosevelt wanted the FBI to track down and capture these bank robbers.
Securities and Exchange Commission (SEC) – a government agency that polices the stock markets. SEC agents investigate financial fraud and manipulation of stock prices.
Federal Communications Commission (FCC) – a government agency that regulates radio and TV transmissions.
National Recovery Agency (NRA) – a government agency that tried to set prices and wages on business and labor, and impose numerous regulations and production standards for all goods and service. This agency no longer exists, because the U.S. Supreme Court ruled this agency unconstitutional in 1936.
Public Works Administration (PWA) – a government agency that contracted with private companies to build 34,599 large public works projects. Government dissolved the PWA during World War II, because the war pulled the U.S. economy out of the depression. These jobs were no longer needed.
National Labor Relations Board – a government board that helped labor unions to grow. Labor unions boost workers’ wages and benefits through strikes. A strike is a coercive technique to force businesses to give into unions. If a business does not agree with the labor union, the workers shutdown production and walk off the job site, financially harming the employer because he has no products to sell.

With the 2008 Financial Crisis, President Obama is not likely to add or expand the number of government agencies. In addition, the President is talking about creating jobs by updating and expanding infrastructure like highways and bridges, which is similar to the Public Works Administration. The reason is the federal and state governments have plenty of bureaucracies that manage the U.S. economy. The federal government would have no trouble creating a government-controlled economy, if it wanted to. The likely scenario is to expand the powers of the current bureaucracies. For example, President Roosevelt greatly expanded the powers of the Interstate Commerce Commission (ICC). The ICC originally regulated freight rates for the railroads, but expanded to regulate trucks, water barges, oil pipelines, and passenger buses during the Great Depression.

The U.S. economy became more socialized during the Great Depression and the economy did improve some. However, the government did not pull the economy out of the Depression. World War II brought the country out of the Great Depression. As Hitler began annexing Austria, Sudetenland, and Poland, did the European war machines fire up and start to buy U.S. military goods. Then U.S. manufacturing was infused with money and jobs.

Conclusion

Many experts and economists are predicting a turn around in the U.S. economy in 2009, but it is not likely to materialize. Many companies are still leaving the United States and all states are experiencing short falls in their budgets. Just remember, many people predicted the same thing at the start of the Great Depression. During the 1930s, many people and experts predicted a better economy, but soon as it started to get better, something else collapsed. It took a decade for people to realize that something severe happened to the economy.

Economists do not know what started the Great Depression or why it lasted so long. Each story always has two sides and in many cases, nobody can tell which story is the correct one. For example, many people view President Roosevelt as a leader who helped ease the Great Depression. He used the federal government to help prevent prices and wages from dropping, created public works jobs, and created a variety of new alphabet-soup government agencies. President Roosevelt did give citizens a message of hope, but some economists believe his reforms actually extended the Great Depression. During the Great Depression, the U.S. economy went into a recession in 1937. (Using logic, if the United States were in a depression, how can it go into a recession?) These economists believe the Great Depression would have only lasted a couple of years if the government did not interfere with the economy.

Some great minds, like Irving Fisher, believed depressions have two characteristics. Both characteristics wreak havoc on an economy:

Deflation – an economy experiences decreasing prices. Deflation hurts business profits, because their revenues fall from decreasing prices. Then businesses layoff workers. More unemployed workers means they have less income to buy products and businesses experience further decreased sales. This viscous cycle continues.
Credit / Debt Cycle – too much credit allow asset bubbles to form and then an economy reaches a saturation point when they cannot borrow anymore and the asset bubble pops.

Credit / debt cycles can be vicious to an economy. For example, an expansion of credit allows industries to expand rapidly. During the 1920s, consumers could borrow, so they could buy homes, appliances, and cars. Factories quickly expanded with the higher demand for their products. This expansion creates manufacturing jobs and more wealth. However, consumers reached a point where they could not borrow anymore. Then demand for these products quickly drops, causing widespread unemployment and bankruptcies. (Sounds suspiciously like the situation in 2008 when American consumers are swimming in too much debt and they stopped contributing to the consumer economy).

The credit / debt cycled occurred in the Stock Market Crash in 1929. Investors could borrow funds to invest in the stock market, which is buying on the margin. For example, an investor could invest a $1,000 into stocks by using $100 of his own money and borrow $900 on the margin. As stock prices climbed, more people are attracted to the market and put more money into it. Of course, buying on the margin allowed people to overextend themselves, but everybody wins when the stock prices kept climbing. As stock prices kept climbing, more and more people invested more money into the market. Eventually, the money stopped flowing into the market. As stock prices started to fall, investors panicked and withdrew all their money out of the market, causing stock prices to crash. Then many financial companies went bankrupt when investors could not pay their margins.

The credit / debt cycle occurred during the U.S. housing boom between 2001 and 2007. Banks used securitization to attract investors to the mortgage market. Banks granted loans to anybody with a pulse rate and a paycheck stub in their pocket. Banks did not care, because they took these mortgages and bundled them together into funds. Investors could buy into these funds. Therefore, the banks got their money back from the mortgages and earned the mortgage fees. Securitization of mortgages attracted large money flows into the housing market. Before 2007, nobody cared! Some people were even buying investment homes on credit, so they could flip them and earn profits. Even if an investor foreclosed on a house, the housing values kept climbing until the housing bubble popped. Unfortunately, asset bubbles can occur with any commodity. The first recorded asset bubble is the Tulip Mania that occurred in 17th century Netherlands. Yes, an asset bubble occurred over flower bulbs [35]!

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References

[1] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, p. 27.

[2] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, p. 1.

[3] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, p. 17.

[4] Ibid, p. 18.

[5] Ibid, p. 15.

[6] Hall , Thomas E. and J. David Ferguson. 2002. The 1920s: A New Era of Prosperity. The Crash of 1929. Greenhaven Press, Inc: San Diego, pp. 22-24.

[7] Ibid, pp. 24-25.

[8] Ibid, pp. 22-25.

[9] Gerdes, Louise I. 2002. The Crash of 1929. Greenhaven Press, Inc: San Diego, pp. 12-13.

[10] Hall , Thomas E. and J. David Ferguson. 2002. The 1920s: A New Era of Prosperity. The Crash of 1929. Greenhaven Press, Inc: San Diego, pp. 26-27.

[11] Klingaman 2002, William K. 2002. “Everybody Ought to be Rich:” The Midsummer Boom. The Crash of 1929. Greenhaven Press, Inc: San Diego, pp. 38-39.

[12] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, p. 31.

[13] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, p. 145.

[14] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, p. 12.

[15] Gerdes, Louise I. 2002. The Crash of 1929. Greenhaven Press, Inc: San Diego, p. 11.

[16] Axon, Gordon V. 2002. Establishing Government Regulations and Safeguards. The Crash of 1929. Greenhaven Press, Inc: San Diego, pp.129-133.

[17] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, pp. 26-27.

[18] Ibid, pp.212-213.

[19] Board of Governors. December 18, 2008. “Press Release.” Federal Reserve System. Available at http://www.federalreserve.gov/newsevents/press/monetary/20081218a.htm (access date 01/09/09).

[20] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, p. 231.

[21] Ibid, pp. 230-237.

[22] Ibid, pp. 213-214.

[23] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, pp. 120-121.

[24] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, p. 196.

[25] Ibid, pp.204-207.

[26] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, p. 87.

[27] Gates, Sudy. 2001. A Hard Life in the Harlan Mines. The Great Depression. Greenhaven Press, Inc: San Diego, pp. 144-118.

[28] Nishi 2001, Dennis. 2001. The Great Depression. Greenhaven Press, Inc: San Diego, p. 158.

[29] Hedgeman 2001, Anna Arnold. 2001. Hard Times in Harlem. The Great Depression. Greenhaven Press, Inc: San Diego, pp. 82-85.

[30] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, pp. 215-216.

[31] Ibid, p. 225.

[32] Ibid, p. 231.

[33] Tax History Museum. “1901-1932: The Income Tax Arrives.” Available at http://www.taxanalysts.com/museum/1901-1932.htm (access date 12/31/08).

[34] Rothbard 1972, Murray. 1972. America's Great Depression. Sheed and Ward, Inc: Kansas City, p. 193.

[35] Wikipedia. 2008. “Tulip Mania.” Available at www.wikipedia.org (access date 12/26/08).