Hall of Mirrors
The Great Depression, the Great Recession, and the Uses–and Misuses–of History
Oxford University Press, New York, 2016, 520 pages
Book Review published on: December 14, 2018
When the international markets began to crash and liquidity constricted in 2008, many saw it as the harbinger of a second Great Depression. In response, central banks applied the lessons they learned from the Great Depression of the 1930s to work in unison to ease the freeze on liquidity and strengthen the markets.
While the crisis was ultimately downgraded to merely the Great Recession, the key questions that confront policy makers was how did the causes of the Great Recession compare to those that caused the Great Depression, and what lessons learned from the latter worked in stemming the tide of the former. It was to answer these questions that Barry Eichengreen of the University of California at Berkley wrote Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History. The result is a fascinating case study of two great financial disasters and how the lessons learned in the 1920s and 1930s were applied correctly and incorrectly some eighty years later.
The first issue is the commonality of the causes of both financial disasters. In both cases, real estate bubbles, lax banking regulation, and over extended credit were among the numerous causes that led to crisis. One of the particular causes for the Great Recession was the inability of policy makers to grasp the important role of nonbank entities such as hedge funds and the shadow banking world of Lehman Brothers type entities. While the historical comparison of causality is interesting, the heart of this book is examining the lessons learned from the 1930s and their application in 2008. It would be impossible in a short review to go through all of the lessons that Eichengreen discusses; a few of the more salient lessons will suffice. Unlike the Depression era that responded with higher tariffs such as the infamous Smoot-Hawley tariff in the United States, central banks across the globe tried to work in tandem to offer multinational action. Given the present administration’s “America First” approach, this lesson is particularly important. Another key lesson was the necessity for decisive action. Following Keynesian policy, central banks lowered interest rates and pumped liquidity into the markets. Notwithstanding some of the positive lessons which were applied, a major failure was the turn toward austerity out of fear of inflation that occurred around 2010. This slowed down the global recovery, but it had a particularly devastating impact on southern Europe.
Hall of Mirrors is a masterful discussion of economic policy and should be read by anyone truly interested in economic policy and those that already understand the story of the Great Depression and Great Recession. Having said that, the author expects the reader to have a solid understanding in both economics and history that relate to these two economic calamities. Hall of Mirrors is a difficult read, exacerbated by the nonlinear organization; there is a constant bouncing back and forth between the two time periods Consequently, I would not recommend it for the novice in economic theory or one not steeped in the intricacies of central bank policies during these periods.
Book Review written by: John C. Binkley, PhD, Wilmette, Illinois