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Media Spotlight: Hall of Mirrors by Barry Eichengreen

Spotlight

Many of the world’s economies are still struggling to regain their previous footing in the aftermath of the financial crisis that has rocked markets since 2008.

More than six years after the collapse of global banking giant Lehman Brothers – widely regarded as the turning point in the crisis – central bankers still face some of the most complex economic questions and challenges ever seen.

How, exactly, does one get a damaged economy back on its feet? Or, worse still, the global economy?

In Hall of Mirrors, University of California professor of economics Barry Eichengreen illustrates the ways in which policymakers have used, and continue to use, lessons from the past to deal with problems in the present – and, importantly, where they have failed to do so.

As a leading scholar on the Great Depression, Eichengreen says poor policy decisions led to that crisis more than 80 years ago – and did so again in the run-up to the recent crisis.

Prior to 1929, central bankers clung anxiously to their respective gold standards, which linked currencies to the value of gold even when that caused wild fluctuations in interest rates. Eichengreen explains how the UK abandoned its gold standard in 1931 and, as a result, did not feel the crisis as deeply as other economies. Japan also enjoyed a relatively fast recovery because it had dropped the gold standard shortly after the UK.

The author points an accusing finger at then-US president Herbert Hoover, who he says “may have understood what needed to be done but this didn’t mean he wanted government to do it”.

Hoover refused to involve the Federal Reserve and instead requested lenders to make voluntary contributions into a pool of money that would be used to help troubled banks – similar to the action taken by the US Treasury in 2008.

Eichengreen explains how the mistakes made in the 1930s helped shape policymakers’ thinking in the wake of the recent recession and he notes that, as a result, US output contracted for only one year before rebounding. While financial markets continue to wobble sporadically, the percentage losses to US shareholders have been significantly smaller than those endured in the 1930s.

Despite highlighting the lessons offered by the Great Depression to policymakers in the modern era, Eichengreen notes the poorly structured efforts of the G20 group of nations, which met in 2009 to agree a huge stimulus package to revive the global economy. He claims countries with the ability to contribute more than others failed to do so, citing Germany in particular.

In essence, Eichengreen presents a juxtaposition of the modern crisis against the backdrop of a depression that took place in a very different world from today’s. He is correct in saying lessons may be learned from the past, but they may not always apply in a different context. Cause and effect must be analysed and appropriate action taken. Policymakers should not simply repeat what was done before.

For this reason, I found Eichengreen’s book educational but somewhat lacking in substance. It is well researched and well written, but the underlying argument that policymakers have not properly adopted the lessons of the Great Depression and applied them to the Great Recession does not entirely hold water with this reader. 

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