The Great Depression of the 1930’s was not caused by the stock market crash in October, 1929 as many people believe. Despite the severity of the drop, in and of itself, it likely would not have caused the enormous panic which lead to a run on banks, massive home foreclosures, 25% unemployment and an 86% drop in stock values. What caused the real problems was the government’s response to the problem. The government did not lower interest rates and kept the money supply constricted. This caused banks to stop lending and trying to reclaim assets (i.e. houses) to beef up their balance sheets. A loss of public confidence coincided with all this, forcing a run on banks.
Though serious, today’s financial problems do not appear to be in the same league as the Great Depression. Today we have FDIC insurance covering our bank accounts up to $250,000 per individual account. There’s no need to run on a bank if you know the government will reimburse you in the event the bank goes out of business. In the 1930’s, banks had the right to "call" a mortgage any time they wanted meaning they could require the borrower to immediately come up with the outstanding balance. This situation does not exist today. The reason people are losing their homes has to do with too much debt compared with their ability to pay it, not with the banks arbitrarily calling the loans. Finally, governments all over the world are pumping massive amounts of money into the financial system which should keep banks lending and commerce flowing
This isn’t to say times today are great, but it may be a great time to make some big purchases like a home, car or a home improvement IF AND ONLY IF you meet a few important criteria:
1) Can you really afford it? Do not buy a home unless you have at least a 10% down payment and the overall monthly mortgage is not more than 28% of your pre-tax income. For a home improvement, only consider a large scale project (like a room addition) if you feel you will be in the home for at least 7 years or more. For a car, now is a good time to haggle. But remember, homes typically appreciate in value whereas vehicles depreciate (consider buying a used vehicle instead of a new one.)
2) Is your income steady? It is likely that unemployment will increase, maybe drastically, in 2009. To evaluate your chances of job loss, you need to look at not just your relationship with your boss, but also the financial strength of your company and of your industry as a whole. In 2000, even people working for the best dotcoms got laid off due to an industry-wide reduction of demand for labor.
3) Is this purchase something I will be happy with for a long time? In the case of a home, home improvement, car, etc. it is important to think not only about your needs today, but your potential needs over the next 5-10 years. Will you have kids? Will your parents need to come live with you?
Depending on your answers to the above questions, this may be a decent time to make big purchases. Though no one can predict with accuracy when housing prices, car prices, home improvement prices, etc. will hit bottom, one thing we know for sure is that all these products/services are significantly cheaper than they were a year or two ago back when everyone was buying.