Depression offers lessons for financial crisis

They are the stories Americans heard from their grandparents, the pictures they studied in history books - bread lines stretching around street corners, shantytowns sheltering the unemployed, small-town banks with darkened windows.

Today's financial crisis is hardly that grim, though it does share some similarities with the economic collapse of the 1930s - both were preceded by a housing boom, a long period of cheap credit and a falling stock market. But those same similarities may offer some reassurance.

What was then economic calamity is today a history lesson. This time, America has been through it before, and there's a guide, at least for mistakes to be avoided as the nation's leaders try to prevent another catastrophe.

Economists have spent decades dissecting the Great Depression. Their findings demonstrate the crippling effect fear has on economic decisions, the tremendous cost of not acting quickly and the risk of damaging the larger economy in efforts to make individuals pay for financially irresponsible investments.

"The number of people with personal memory of the Great Depression is fast shrinking with the years," one noted expert said in 2004 in a speech at Washington and Lee University. "However, although the Depression was long ago... Its influence is still very much with us."

That expert was Ben Bernanke, a former Princeton University professor and an expert on causes of the Depression. He's now the chairman of the Federal Reserve, the US central bank.

Today economists partly blame the Fed for the Depression because it raised interest rates even as the economy was slowing in the late 1920s. Then when banks began to fail, it took a hands-off approach.