The 21st Century Economic Depression

My father was in his teens during the 1930's and the Great Depression. He use to tell me all kinds of tales -- some true, some not, and some that were true but were unbelievable about growing up during the Depression. It looks like we are in for another bumpy financial ride this week. This descriptive and dramatic story from yesterday's New York Times tells the story of the beginning of the end for many Wall Street high-rollers:
Dinner parties were canceled. Weekend getaways were postponed. All of Wall Street, it seemed, was on high alert.
In skyscrapers across Manhattan, banking executives were holed up inside their headquarters, within cocoons of soft rugs and wood-paneled walls, desperately trying to assess their company’s exposure to the stricken Lehman. It was, by all accounts, a day unlike anything Wall Street had ever seen.
There's a lot that sounds familiar in this excerpt from Wikipedia on the causes of the Great Depression:
...in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
Massive layoffs occurred, resulting in unemployment rates of over 25%. (US) Banks which had financed this debt began to fail as debtors defaulted on debt and depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.
The debt became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
It looks like today's economy is in a kind of slow motion death spiral too. A vicious cycle indeed. The government couldn't stop the economic depression in the 1930's and they won't be able to stop the next one either.