No. A Depression is not possible. At least, I don't think so. But the very fact that I qualify the answer suggests how dangerous the current financial crisis is.
Too much of what is going on today resembles the 1920s, when speculation was rampant, conflicts of interest the order of the day, and borrowing to invest (on margin, in those days) was unconscionably high. Financial institutions were over-leveraged, and asset values were pushed to levels that made no sense. Commercial banks even urged savers to invest in their own stocks.
Today, we are in the same boat, if a newer version, and for many of the same reasons. The regulations adopted in the 1930s to undo and minimize the abuses of the 1920s were mostly rolled back over the course of the last generation. This was led by both Republicans and newly centrist Democrats, from Carter to Clinton. Not that all those regulations were still necessary. But many were.
When the cat was caged, the mice simply played. Or as Al Wojnilower, the septuagenarian (or perhaps now octogenarian) economist of prominence with First Boston before Credit Suisse now puts it: "As soon as lenders of other people's money are freed of constraint, they are spurred by huge short-term rewards to compete addictively with one another in taking bigger and bigger risks."
We have government regulation because time and again over at least two hundred years of history, the financial community has gone down the same road. They say they know better this time. And they don't. It reminds me of Walter Wriston, who insisted his bankers at First National City, later Citibank, knew how to assess risk. They then lent willy-nilly to Penn Central, which filed for bankruptcy in 1970. Wriston was furious because Penn Central management lied to him. Of course it did. It needed the money. Did he not really know they would? National City took the biggest lost in its history to date, begged the federal government to lend Penn Central more funds, and only got the Fed to open its lending window.
Oh, yes, here's why I think no Depression, which to define it simply is a really big, deep and long recession, in which we all will suffer a lot.
First, the government is now and has automatic stabilizers like unemployment insurance and Social Security. That spending supports consumption, providing a floor to the economy that did not exist in the 1930s.
Second, Ben Bernanke actually learned something form his academic studies of the Depression. And it was not the damaging over-simplifications of Milton Friedman's preachings about the money supply. He learned that you had to keep the credit system running. Back then, banks failed literally everyday -- thousand before it was over.
Bernanke may not know how to do this in the most efficient way -- no one does. But he is attending to it. All the bellyaching after the fact is just sour grapes, often from those who want to be bailed out. He is stepping up to the plate, consciously and aggressively.
Third, so is the Democratic Congress. It is the president who is dragging his feet. The House led the way on a $170 billion stimulus package in early December. Both the House and the Senate now have proposals to insure risky mortgages, which should be passed. The president is biding his time, mouthing clichés about being careful about market intervention. If the Republicans controlled Congress we might indeed be in greater trouble.
Still, there is plenty to do, of course. The House is talking about a second stimulus package. They should add long-term public investment in infrastructure, education and healthcare to that, as well as extended unemployment insurance and money to the suffering states.
The mortgage rescue package, yes with taxpayer money, should be passed. And speed is of the essence.
Then we should re-regulate, rapidly but intelligently, listening closely to Wall Street but not being rule by them or their securities traders.
And for now we shouldn't worry about inflation. If the economy falls, the speculation in oil and other commodities will also end. Those prices may even collapse. And there is nothing like the embedded expectations of the 1970s.
It's within our power to solve these problems. But it could go wrong. The good news is that some in Washington in positions of power now know this.