Robert Kuttner gives three reasons in the American Prospect website why this crisis could be worse than the 1930s:
[One,] the financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, we had a stock market bubble, mainly because people could play the market "on margin," borrowing to invest in stocks. There were also scams like the original Mr. Ponzi's. Like the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules.
But today, thanks to "securitization" of loans and the ability of insiders to create exotic and unfathomable financial instruments, the current speculative system makes buying stocks on margin look like child's play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do. We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.
[Two,] the economy now bears all the hallmarks of a depression. Between the housing collapse and the stock market crash, American households are out several trillion dollars (in the 1920s, there were no 401 (k) plans and less than 2 percent of Americans owned stock).
When people are suddenly out a lot of money, they spend less. Weak demand in one sector cascades into other sectors. People spend less on autos, air travel, hotels, restaurants, clothing -- any optional purchase. Business sales and profits are down, which causes other layoffs, and the cycle deepens.
[And three,] America in 1929 was a major international creditor. Today, we are the world's biggest debtor. The financial bubble of the past decade, puffed up by foreign borrowing, created the illusion of prosperity.
During the bubble years, the borrowing from overseas disguised domestic weaknesses, such as our much diminished manufacturing sector and the fact that wages for most Americans were not keeping up with inflation. Households, like Wall Street, became overly reliant on debt. For now, foreigners are still willing to lend us vast sums, but that may not continue indefinitely as nations like China invest more in their own internal development.
Conclusion: President Obama needs to grasp just how radical a set of solutions we need. Then he needs to use his gifts as teacher-in-chief to persuade the public and the Congress to follow his lead.
Can America recover from a Great Collapse? Can we avert a second great depression? To coin a phrase, yes we can. But we need the right strategies and we don't have much time.