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The Dow pulls back a couple of hundred points and already the bears are fear mongering. We’re headed toward another Great Depression, they say. The market will plummet 89% top to bottom just like it were 1929 all over again. Of course, Cramer doesn’t believe a word of it. And he spent a part of Monday’s show proving these cynics wrong.
First point: President Obama is not Herbert Hoover. Hoover raised taxes, focused on balancing the budget and kept a lid on spending. Not Obama. Every analysis of the Great Crash points to the strong action necessary to lift an economy out the depression doldrums. And that’s just what this president is doing, with his deficit spending and lowered interest rates. Obama’s approach to this crisis couldn’t be any further from Hoover’s.
Also, don’t compare Federal Reserve Chairman Ben Bernanke with his 1929 era predecessor Roy Young. Instead of cutting interest rates to flood the system with money, Young raised those rates. Sure, it took Bernanke a while to get with Cramer’s program, but Big Ben is on board now. Rates are as low as they can go, and he’s buying up debt, whether it be securitized student and car loans or mortgages. Again, this is the exact opposite of Fed policy at the beginning of the Great Depression.
Banks aren’t collapsing as they did back then either. In fact, we now have the benefit of the policies put in place to prevent another depression, such as the FDIC insuring bank deposits. Plus, both the Fed and the Treasury have recently implemented plans – such as Secretary Geithner’s idea of getting the private sector involved in buying banks’ toxic assets – to keep financial institutions from failing.
Medicare, Medicaid, social security, unemployment insurance – they’re all there to rescue the unfortunate in ways that just didn’t exist 80 years ago. Economists call these programs “automatic stabilizers” because they operate regardless of the economy’s strength, immediately giving money to those who need it and will spend it.
Worst-case scenario unemployment hits 10% nationally – as it has in seven states so far. But that’s nowhere near the 24% we saw during the Great Depression. Between 1929 and 1932, production dropped 75% in many manufacturing industries. In this most recent crisis, steel has dropped about 60%. But it’s stabilizing and looks to be the worst of the worst right now.
The bottom line is that we’re in a completely different place than we were just before the Great Depression. So ignore the doomsayers who predict we’re headed there again. Yes, we took a hit on Monday. But it’s certainly no sign that the market is done going higher. In fact, Cramer thinks this decline is worth buying.
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