Book Review 340: Hall of Mirrors

HALL OF MIRRORS: The Great Depression, the Great Recession and the Uses -- and Misuses -- of History, by Barry Eichengreen, 512 pages, Oxford. $29.95

Santayana said those who do not remember history are fated to repeat it. Marx said history repeats anyhow, first as tragedy, then as farce. Barry Eichengreen says even those who study history are in danger of drawing the wrong conclusions.

And draw them they did in the Great Recession that began in 2007.

It had its farcical aspects, which Eichengreen is not slow to note. Among writers on economics, he is among the most stylish and witty, though without the meanspiritedness of, say, Galbraith.

He draws many valuable lessons, but the big one is that the policymakers of 2008 and since did well to avoid the disasters of the policymakers of 1928-33, but that their success included its own punishment: Because they avoided catastrophe -- settling instead for mere disaster -- they lacked the incentive to move to genuine reform.

He leaves us with this warning: “Thus, the very success with which policy makers limited the damage from the worst financial crisis in eighty years means we are likely to see another such crisis in less than eighty years.”

“Hall of Mirrors” is structured in a way that can be somewhat confusing or intimidating for readers who are not well-versed in the economic history of the ‘20s and ‘30s. He races over some of the incidents that led to the Crash, from time to time relating them to incidents in the 21st century financial collapse. The book is dense with facts, opinions and analysis, and it sometimes takes a second reading to determine whether a statement applies to then, now or both then and now.

And though he tries to keep the thread of the American failures separate from the European failures -- they had their own histories and trajectories -- inevitably they become tangled up at times.

This is financial history, dealing in aggregates, so it pays little attention to industrial or agricultural history. Only rarely does Eichengreen pause to disaggregate an aggregate to point out that not all sectors (or subsectors) experienced the main trends the same way.

This is my biggest disappointment in the book, although doing it differently would have resulted in a volume so big nobody would read it. But ignoring agriculture misses the fact that the Great Depression began for farmers after the harvest of 1921. Industrial production was exploding, so farm output was becoming less and less significant if you look at aggregates (as Eichengreen does). But two in five Americans were dependent on renewable resources (farming, forestry and fishing) before the Great Crash, and so many people are important even if -- as Mitt Romney would say -- they don’t make enough money to bother about.

The New Deal worked. Eichengreen is clear about this. It is a rightwing talking point that it failed, but the numbers show it worked.

Eichengreen, fixated for both crashes on restoring normal output, is critical of those parts of the New Deal that worked against reflation; but there were other things that needed doing. Yes, Social Security was deflationary and tended to delay full recovery, but as Harry Hopkins used to say, “People don’t eat in the long run, they eat every day.”

When it comes to the 21st century crash, Eichengreen firmly lists failure to regulate first: “The crisis taught the United States some hard lessons about the inadequacies of financial regulation, although acting on those lessons was more easily said than done.”



This is inordinately cheerful. No one in the Republican Party learned those lessons, and the Teadiots learned a sort of upside down version. Certainly neither group would endorse the kind of fiscal stimulus that Eichengreen rightly considers bedrock policy in a deflationary crisis.

But, as he notes, even midstream economic thinkers were -- and still are -- mesmerized by the problems of inflation, although these do not exist. (“The dangers to which they pointed were largely illusory,” he writes.)

Only a few residual New Dealers understand that deflation is the problem and that, unlike inflation, it is not easily dealt with by the limited repertoire of remedies that governments and central banks can use. (It is worth mentioning that in ferreting out the causes of the Great Recession, Eichengreen does not assign any weight to the villain that the rightwing is certain caused it: the Community Reinvestment Act. Never even mentions it.)

Instead he fingers the “shadow banking system” that had grown up, especially since the nostrums of Reaganomics began to take hold. These are the insurance companies, hedge funds, special purpose vehicles (off book operations of commercial banks) and the like, which made up nearly two-thirds of nonfinancial credit in the United States at the time of the Crash of ’08.

For Europe, where banks have always been more important, he does finger banks.

He also scolds the moralists, who in each crash and on each side of the Atlantic allowed indignation to trump effective recovery policies.

That, he says, was behind the “single most important” policy mistake in the late crash, the failure to rescue Lehman Brothers.

I would say the single most important policy mistake was Reaganomics, the failure to understand that unsupervised markets fail. Lehman was just an episode.