Why it's not 1929: policymakers won't make the same mistakes.

• Author: DeBoer, Larry
• Position: VIEWPOINT

YOU CAN'T OPEN THE paper these days without reading something like, "This is the (fill in the blank: worst, biggest, first time) since the Great Depression." So people might wonder, will this be another Great Depression?

We'll have a recession, maybe a bad one. The financial crisis stopped banks from lending, and that will reduce business spending. The rest of the world is having troubles, too, and that will reduce spending on our exports. The drop in home prices and in the stock market has reduced household wealth. Our third-quarter pension statements have made that uncomfortably clear. Consumers will spend less.

But all the bad news won't cause a depression, and certainly not a Great Depression. Here's why.

There are three strands of thinking about what caused the Great Depression of the 1930s. One blames the Federal Reserve Board. The Fed increased interest rates in 1928 and 1929, trying to stop stock speculation. Instead, business and consumer spending dropped, and that helped start a recession in the summer of 1929, even before the stock market crash.

Banks got scared and quit lending. The Fed wouldn't increase bank reserves, so real interest rates shot upward. That cut business spending more. Banks began to fail, because their borrowers couldn't repay loans, and because depositors started bank runs. The Fed refused to act as a lender of last resort--the very thing it had been created to do--and allowed one-third of all banks to fail. Household savings vanished or were tied up in court, and consumers cut their spending. Businesses lost their relationships with their old bankers and had a hard time convincing new bankers to lend.

That's all different now. Fed chair Ben Bernanke knows that the Fed helped cause the Great Depression. He's determined not to let that happen again. The Fed has cut interest rates. It's pouring money into the banking system. So is the Treasury. So far that hasn't helped much, but it will. (If it doesn't, we'll have to let the Fed off the hook for the Great Depression.) We've got the Federal Deposit Insurance Corp. insuring bank deposits up to $250,000. If a bank does fail, most household savings are safe.

The second strand of thinking about the Depression blames events that cut consumer and business spending directly...