You know we’re in deep shite when economists (and Barack Obama) start comparing these hard economic times to what went down during the Great Depression.

“This feels very similar, historically, to 1929 and the emotions that filled the air in the months and years that followed the crash . . . There is a sense of extraordinary shock and astonishment, which is followed by a sense of rage, outrage, and anger directed at the centers of finance,” Steve Fraser, author of Wall Street: America’s Dream Place, said in a New York Times article published over the weekend.

So what exactly happened here? Methinks we’ve been spoon-fed a rather large dose of déjà vu.

Let me explain:

For years, homeowners saw their property values skyrocket. So they thought: Why sit on this accruing capital when it could be turned around and used to finance other endeavors, such as sending the kiddies to college or purchasing that fully-loaded Mercedes with a built-in cappuccino maker for the morning commute? Many folks who fell in lower income brackets, but owned houses of moderate value, qualified for sub-prime loans. A lot of peeps acted on these offers and signed up for second or third mortgages on their houses, refinanced with larger mortgages, or simply bit the bullet and got fat loans to move into even bigger dream homes.

Banks and other savings and loans institutions speculated that the housing market would continue to kick it up a notch and, thus, were eager to give out these loans. A little too eager. Some of these financial institutions, now called “predatory” lenders, were beyond aggressive in their attempt to hand over the money—why? If these sub-prime homeowners actually defaulted on their loans, then the banks could still foreclose on the properties, repossess, and sell them at profitable rates. Sneaky, sneaky.

But alas, what goes around, comes around. The market value of a lot of the homes had been greatly exaggerated at the outset, so when peeps started defaulting on their loans and banks began repossessing these properties, there was an itty-bitty problem. The banks couldn’t re-sell the homes at the prices they originally anticipated. As banks lost more and more capital on these sales, the money supply used to help finance other sectors of the economy — from credit cards to small business start-up loans—started to diminish. All of this manifested in the collapse of a few major banks and, ultimately, down went Fannie Mae and Freddie Mac too.

The downfall of Fannie and Freddie is quite ironic, given the way these institutions came into being. Both of these organizations were established by the federal government after the collapse of the stock market in 1929 as part of FDR’s New Deal. Government at that time recognized that an unregulated market caused the speculation that resulted in the market crash. (We’ll call this Lesson-We-Should-Have-Learned: Take One.) Through the creation of the Federal Insurance Depository Commission (FDIC), the government guaranteed that any money dropped in the bank would be insured against the bank’s failure. This created a sense of security that allowed peeps to once again entrust their dinero to the banks. Fannie and Freddie played the role of providing such insurance to peeps who deposited in savings and loans banks that specialized in mortgage lending. The system worked very well until the 1980s when, ahem, a Republican had his foot in the door of the Oval Office.

Ronald Reagan, the populist free marketer, considered the government’s role in the banking business to be a problem, so he attempted to remove many of the government’s supervisory functions. This proved to be a Bad Deal. Such deregulation, for example, enabled savings and loans banks to creatively classify hotels and resorts as “housing” activities. Some of these banks began using the deposits of their investors to develop failed five-star resorts and, ultimately, the federal government had to step in and bail out the banks. Deregulation was clearly a problem. (Lesson-We-Should-Have-Learned: Take Two.)

As is our tendency, we didn’t learn from this mistake, and kept up the deregulation. Fast forward to last Friday when the House of Reps had to approve a whopping $700 billion bailout bill, which marked the biggest act of government intervention in the market system since the Great Depression. Whaddya know: Here we are. Full-circle. Back to the Great Depression.

But has it really come to that?

Not yet, says Nake Kamrany, a senior lecturer in the economics department at USC:

“The bailout has saved banks and financial institutions, and in due course the government should be able to recoup and even make a profit . . . Only a rich country with a sophisticated economic apparatus like the U.S. could manage to finance $700 billion of bailout, on top of a very heavy annual budget deficit, national debt, and the recurrent cost of the Iraq and Afghanistan war. Most other countries could not engage in this kind of refinance.”

But Kamrany goes on to warn:

The additional national debt will stay in the books and if it has any adverse affect, it will show in lowering the value of the dollar’s exchange rate, [which will] cause an unfavorable balance of trade  and domestic inflation. If confidence shifts away from the dollar, the petro-countries and others may shift to alternative currency, such as the euro, and that will further deteriorate the value of the dollar as an international currency.

Bailing out the banks was not our only option, reminds Kamrany. He says the government could have opted to bail out homeowners, small businesses, and unemployed workers, but it went with the so-called trickle down approach to the problem. Kamrany claims that the economy “probably would have done better,” had the government decided to instead bail out the people. The method we’re using may require more than $700 billion to get everything back on track, he says, “but we’ll just have to wait and see.”

So what does all this mean to you and me? Barack Obama, who voted in favor of the bailout bill in the Senate last Wednesday, recently broke it down to MTV. He, too, compared the sitch to the Great Depression and warned that “if we don’t do [the bailout], it can have an impact on everybody, and especially the next generation because if the economy slows down, they’re the ones who are going to have the toughest time finding a job.”

Whether we’re for the bailout or against it, we—the next generation—need to take careful note of what went down here and be sure not to screw ourselves again. History doesn’t have to repeat itself. We can learn from these mistakes we make. If we go about this the right way—forty years from now, when we’re chillaxin’ in our La-Z-Boy recliners with the grandkiddies in our laps, the “great sub-prime mortgage crisis” of 2008 will be the only justification we’ll have (and not Lesson-We-Should-Have-Learned: Take Three) for being a bunch of crabby ol’ cheapskates.

A little memory can go a long way; so let’s make the most of what we have now, while we still have it, shall we?

Tags: bailout, Great Depression, history 101, sub-prime mortgage crisis