Who says there’s never any good news?

Five experts on the economy say the United States isn’t headed for a depression reminiscent of the 1930s even though just about every day it seems there’s dire news of tens of thousands of people being thrown out of work or business behemoths like Chrysler and GM teetering on bankruptcy.

“I see little risk of a repeat of the Great Depression because we’ve learned from that earlier experience,” says Prof. Thomas Hopkins, an economist at the Rochester Institute of Technology. “The actions now underway in Washington will be on balance helpful in slowing the decline and hastening the recovery.”

The D-word is seldom, if ever, mentioned in news dispatches … possibly for fear of scaring people, or it’s simply too petrifying a possibility to contemplate. But International Monetary Fund managing director Dominique Strauss-Kahn did declare that the world’s advanced nations are “already in depression” after a speech in Kuala Lumpur in early February, and British Prime Minister Gordon Brown used the word “depression” to describe the global economy, though his aides dismissed it afterward as just a slip of the tongue.

In any event, there’s no standard definition of an economic depression. Suffice it to say that grim memories of the 1930s in America … the stock market crash, an unemployment rate of about one-third, farmers being foreclosed by banks, numerous banks failing, and ragtag unemployed former executives selling apples for pennies on the street … give most people enough evidence of what one would be like.

“No, we’re not going into a depression, but we are in a severe recession,” says Prof. Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. “Comparing the United States in the late 1920s to now is beyond comparing apples and oranges. Some similarities exist but today’s economy is markedly different. There’s globalization of financial markets for one thing, and federal deposit insurance for another.”

At the height of the Great Depression, more than 20 percent of the municipalities in the U.S. were in default on their bonds … generally due to the collapse of their revenues. “Today, while revenues are declining, we’re nowhere near those extreme conditions … less than 2 percent of the nation’s municipal-bond issuers are in default,” says Michael Stanton, managing director of SourceMedia’s Capital Markets Publishing group, which includes The Bond Buyer, the daily newspaper of public finance.

What got us into our predicament?

“Americans have been on a consumption spree that has eaten up all savings and resulted in mortgaging of their souls,” says Rod Klein, a capital financing expert and University of Phoenix (Chicago campus) faculty member. “We believed the value of houses would keep up an explosive growth. Real estate was so alluring that many decided to invest in real estate ventures in lieu of more conservative savings options. A large part of the spectacular growth in real estate values comes from the simple principle of supply and demand. Demand has sunk!”

Klein also points out that the U.S. government, starting in 1977 with enactment of the Community Reinvestment Act and sparked by fundamental changes in 1994 of bank lending practices, “loosened underwriting standards, including the size of the mortgage payment relative to income, credit history, savings history and income verification. A massive amount of mortgages represented subprime ventures which homeowners would be unable to afford if the economy soured.”

As a result, “the states most (currently) affected … Florida, California, Arizona, Nevada … were the ones front and center in the housing market boom,” says Prof. Snaith. “Texas didn’t participate in the housing run-up and has fared well by comparison during the housing bust. However, no one is completely insulated from a recession as deep and long as this one has turned out to be.”

Veteran banker John Jackson, president & CEO of Lending Cycle, Inc., Louisville, Ky., believes that “inflated wages and revenue in the 1990s, combined with easily obtained credit, created an environment that couldn’t be sustained. Once those wages and revenue returned to normal levels, our economy couldn’t continue at the heightened pace. People and companies continued to spend beyond their means.”

What’s getting us out of our predicament is basically a determined effort by the government to energize the economy via the massive bailout bill. “We’re seeing a lot of rapid and dramatic policy action to prevent things from getting worse,” says Prof. Snaith. “As for improvement, things have to stop getting worse before they can get better. There are some signs of that … we’re not seeing thousand-point swings in the market. We’re out of the panic mode.”

One danger as the U.S. bounces back, if indeed it does, is inflation resulting from all the forceful government activity.

“America will face chronic inflation owing to immense government and private debt burdens,” Klein predicts. “At this time, the two sectors of the economy owe in excess of $100 trillion, half the debt to units of governments. The government portion consists mainly of Social Security and Medicare/Medicaid program obligations. Compounding this burden is the diminishing savings Americans have to meet retirement or personal debt obligations. Our citizens used to enjoy a high rate of savings. Not any more.”

Prof. Hopkins notes that “the expanded rate at which the Fed is attempting to ease credit does indeed create a risk, once recovery begins, of ratcheting inflation rates upward. But the Fed is equipped to swing into a credit-moderation role and should be able to forestall that problem from getting out of hand. At present, of course, there are more signs of price declines than increases, and deflation is just as damaging as inflation. But I am optimistic that the Fed will be able to navigate us between both extremes.”

And the best possible outcome?

“We have the opportunity to emerge stronger and smarter,” says Jackson. “I am optimistic about our county’s future.”

By Gerry Storch