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Depression, Recession and the Burden of History

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Hall of Mirrors: The Great Depression, The Great Recession, and the Uses – and Misuses— of History by Barry Eichengreen, Oxford University Press, 520 pages.

In 2002, then Federal Reserve Board Governor Ben Bernanke visited Milton Friedman in Chicago to wish the influential economist a happy 90th birthday. Friedman famously apportioned a large part of the blame for the Great Depression on the misguided policies of the Fed during the 1920s and 1930s. Bernanke told him: “You were right. We did it. We’re very sorry. But thanks to you, we won’t do it again.” In Hall of Mirrors, the latest book from Berkley economist and historian Barry Eichengreen, the author asks whether Bernanke and other policymakers did in fact understand and correctly apply the lessons of the Great Depression.

Eichengreen has written extensively on the Depression, gold standard, and the US dollar. His latest project is his most ambitious, however. Hall of Mirrors is an attempt to place the 2008 financial crisis and subsequent recession within the historical context of the 1929 stock market crash and Great Depression. No shortage of academics, pundits, and policymakers have drawn connections between the two events— hence the moniker “Great Recession”— but Eichengreen is the first to conduct an exhaustive comparison. He succeeds in weaving the local and global, individual and systemic, into a smooth, coherent, and compelling narrative.

The first part of Eichengreen’s book is aptly named “The Best of Times,” showing in parallel the boom decades of the 1920s and the 2000s. While the Federal Reserve’s loose monetary policy was combined with feckless financial regulation in both occasions, Eichengreen is careful to highlight the differences. The post-2008 Fed has been criticized for promoting narrow US interests to the point of putting the international system at risk, but during the 1920s, it did the opposite. Motivated by the desire to restore the pre-war gold standard, the effect of the Fed’s low interest rate policy was “less to rebalance the world economy than to unbalance the economy of the United States.” Where the US of the 1920s was a creditor nation, the 2008 crisis was fueled largely by post-millennium America’s persistent trade deficit, as China and South Korea invested their surpluses in the US housing market.

The most compelling aspect of Hall of Mirrors is the author’s appraisal of the response to the 2008 crisis and its aftermath. Eichengreen maintains the posture of the aloof academic throughout, decrying that the response to both crises was hamstrung by populist politicking. The Reconstruction Finance Corporation chose politics over policy in letting the Guardian Group of banks fail in early 1933. The same mistake was made in 2008 when the Treasury allowed Lehman Brothers to go under, an event which Eichengreen calls the “single most important policy failure of 2008.” Populism won in both cases, but the decision to be hard on Wall Street had dire consequences for Main Street.

Of course, no book written on the Great Recession can ignore the topic of austerity. Eichengreen saves it for the final section of his book, viewing attempts at fiscal retrenchment in the US and Europe in view of the 1937 “Roosevelt Recession,” a second downturn frequently blamed on the President’s attempt to balance the budget. Eichengreen finds that post-2008 austerity was much more destructive, however. Fiscal consolidation can fuel growth by pushing down interest rates. However, in the climate of near-zero rates that prevailed on both sides of the Atlantic after 2008, such a policy did nothing but depress consumer demand and raise unemployment. Eichengreen’s chief culprits are White House budget director Peter Orszag and the European Commission, which he condemns for disastrously pushing spending cuts in the Mediterranean even after they were shown to be counterproductive.

Were the lessons of the Great Depression learned and applied? Eichengreen’s simple answer is “yes.” But that comes with heavy reservations: “Policy makers in the United States and other countries, their actions informed by this narrative, responded quickly and forcefully to events … The paradox is that we failed to do better.” The immediate response to the financial crisis was surprisingly effective, save for allowing the failure of Lehman. The fact that “collapse of the monetary and financial system was averted” became an impediment to further action, however. Policymakers eased up when they should have done more.

Eichengreen’s text has flaws. His prose is excessively wordy at times, and he fiercely criticizes the Eurozone without putting forth an alternative. As a historian his hindsight is 20/20. Policymakers simply don’t have that luxury. But this book is comprehensive, intellectually sound, and accessible to scholars and laypersons alike. Its theses will be debated upon for decades to come.

Joseph Larsen

22.01.2015

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