The country's current economic crisis is creating a sense of deja-vu for Americans who were around in the 1930's and early 40's. Financial Professor Robert Earl Stuart of Troy University says one of the major factor in both The Great Depression and our current economic crisis is too many risky investments.
Franklin Delanor Roosevelt said it best, "we have nothing to fear but fear itself".
Stuart said, “it was over-speculation or it is over-speculation on real estate and financial institutions to make higher risk loans over the last twenty years that has caused the current crisis".
Professor Stuart says banks right now aren't failing; they just don't have additional money to give out loans. During The Depression people were taking out high-risk loans to buy stocks, and when the stock market plummeted, no one could sell their stocks for what they owed on them.
This caused banks to crash, and when that happened stock speculators weren't the only ones who lost everything, all the customers did too.
"There were people borrowing money to buy stocks thinking that the stock would continue to go up and they could sell out of those stocks and make a good gain, obviously they didn't understand that the stock market goes up the stock market can come down" said Stuart.
And though it appears banks are now failing for the same reason, this isn't the case. Only thirty one of eight thousand U.S. banks have gone under in the past three years. But banks still don't have the means to make loans available now.
According to Stuart, "This is a problem of the capital of our depository institutions being impaired because of having to write the value of these mortgages that are not paying, and when your capital is impaired it lessens your ability to make more loans."
But the similarities between then and now are glaring. The inability to pay loans hurts banks, which causes banks to tighten credit lending. Tightened credit lending hurts businesses, causing them to downsize. People lose their jobs and don't have money to spend on goods and services.
"The private market got in trouble back in the twenties and government got us out. Now the government got us into the problem and the government is gonna get us out."
The FDIC insures deposits up to one hundred thousand dollars, but finance experts believe something needs to be done soon in order to restore banks' capital, so the United States credit system can recover.
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