Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History
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The two great financial crises of the past century are the Great Depression of the 1930s and the Great Recession, which began in 2008. Both occurred against the backdrop of sharp credit booms, dubious banking practices, and a fragile and unstable global financial system. When markets went into cardiac arrest in 2008, policymakers invoked the lessons of the Great Depression in attempting to avert the worst. While their response prevented a financial collapse and catastrophic depression like that of the 1930s, unemployment in the U.S. and Europe still rose to excruciating high levels. Pain and suffering were widespread.
The question, given this, is why didn't policymakers do better? Hall of Mirrors, Barry Eichengreen's monumental twinned history of the two crises, provides the farthest-reaching answer to this question to date. Alternating back and forth between the two crises and between North America and Europe, Eichengreen shows how fear of another Depression following the collapse of Lehman Brothers shaped policy responses on both continents, with both positive and negative results. Since bank failures were a prominent feature of the Great Depression, policymakers moved quickly to strengthen troubled banks. But because derivatives markets were not important in the 1930s, they missed problems in the so-called shadow banking system. Having done too little to support spending in the 1930s, governments also ramped up public spending this time around. But the response was indiscriminate and quickly came back to haunt overly indebted governments, particularly in Southern Europe. Moreover, because politicians overpromised, and because their measures failed to stave off a major recession, a backlash quickly developed against activist governments and central banks. Policymakers then prematurely succumbed to the temptation to return to normal policies before normal conditions had returned. The result has been a grindingly slow recovery in the United States and endless recession in Europe.
Hall of Mirrors is both a major work of economic history and an essential exploration of how we avoided making only some of the same mistakes twice. It shows not just how the "lessons" of Great Depression history continue to shape society's response to contemporary economic problems, but also how the experience of the Great Recession will permanently change how we think about the Great Depression.
amount of bond issuance even by the standards of U.S. Steel. Among other things, it had the effect of accustoming American investors to holding foreign bonds. Following the US declaration of war in April 1917, the country’s foreign lending was channeled through governments, including loans by the American government to its European allies. American investors bought the Liberty Bonds of the US Treasury, receipts from which were used to fund war loans. In the late nineteenth and early twentieth
had been reached just eight times over the previous decade. From there, activity rose still higher. 58 hall of mirrors Evidently, the large investors clubbed together in pools organized by the likes of Billy Durant were being joined by a growing number of small savers. Individuals who had relied on professionals employed by investment trusts to manage their portfolios took to buying and selling securities directly. Brokerage firms opened branch offices featuring customers’ rooms fitted out
Germany sought political integration, and together these elements were the basis for a deal. To be sure, there were also those in Germany, notably officials of the central bank, the Deutsche Bundesbank, who opposed monetary integration in advance of political integration, and those in France, leading technocrats among them, who embraced political as well as economic integration. Still, that was the essence of the deal. The French achieved quick results with the creation of the European Economic
for their smooth operation will follow. These were the functionalist arguments that economists supplied to receptive officials. Specialists in European politics, better attuned perhaps to the realities, were skeptical of this functionalist logic. Just because a certain set of political institutions is required to support a certain set of economic arrangements is no guarantee that they will be produced.7 Politics, rather than responding to economic logic, has a life of its own. The founding
assessment missed was the structure of housing finance. Even limited declines in housing prices could now disrupt the mortgage market because of how lending was structured. And the impact of worsening mortgage-market conditions could have much graver implications for the financial system because of the increase in leverage and the development of a shadow banking system subject to minimal regulation. Those implications would be especially serious for banks that warehoused collateralized debt