The logic of historical analogy is “never more compelling than in a crisis,” said Barry Eichengreen, the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. But choosing the right analogy is never easy. At the Hutchins Center on Fiscal and Monetary Policy at Brookings, Eichengreen contended that policymakers in both the United States and Europe could have done a better job of applying the lessons of the Great Depression in the 1930s before and after the recent crisis, though he gave them high marks for avoiding mistakes that could have turned the crisis into another Depression.
Here are some highlights from the event, with video clips.
The United States: Today, the conventional narrative is that policymakers in 2008—heeding Milton Freidman and Anna Schwartz’s teachings that inept central bankers turned a recession into a Great Depression in the 1930s—stabilized the money supply, flooded the banking system with liquidity, and promoted fiscal stimulus, with the result that unemployment in the U.S. peaked in 2010 at 10%, far below the catastrophic 25% level that prevailed during the Great Depression, and failed banks numbered in the hundreds, rather than the thousands. “Unfortunately this happy narrative is too easy,” said Eichengreen, because “it is hard to square with the failure to anticipate the risks.” Regulators and economic historians should have seen the strong historical parallels between the excesses of the 1920s and the 2000s. Instead, in the run up to the recent crisis, regulators focused on the commercial banking system and neglected the risks posed by non-deposit taking shadow banks such as Lehman Brothers (whose bankruptcy Eichengreen called “the single most serious mistake of the financial crisis”). In the clip below, Eichengreen discusses parallels between regulatory changes after the Great Depression and the Great Recession with Chris Brummer, professor of law at Georgetown University, and David Wessel, director of the Hutchins Center.
Europe: “The euro is just like the gold standard of the 1930s in two respects”, Eichengreen observed. First, both are monetary unions without a banking union, fiscal union, and political union. Second, both monetary arrangements come with “ideological and political baggage” related to inflation and balanced budgets. However, they differ in one fundamental way: in the 1930s individual countries retained their own currencies, making it straightforward to suspend gold convertibility and allow currency depreciation. Today, abandoning the euro would be much more difficult. In addition, Eichengreen found “perplexing” that the German historical memory of hyperinflation during the 1920s strongly informs Germany’s political stances today, but its experience with austerity and high unemployment during the 1930s does not. Eichengreen cited the successes of President Franklin Delano Roosevelt’s “shock and awe” growth-promoting policies against the difficult political and economic backdrop of the Great Depression in the 1930s, but did not “think Europe is constitutionally or temperamentally set up to implement economic policies of shock and awe” that are needed to promote growth. The following clip focuses on the importance of international cooperation in the Eurozone:
Watch the video of the entire event below to see Eichengreen’s presentation and the subsequent panel with Brummer and David Lipton, First Managing Director of the International Monetary Fund.