31 May Review of Hall of Mirrors by Barry Eichengreen
Mr. Eichengreen sub-titles his book “The Great Depression, The Great Recession, and the Uses – and Misuses – of History”, and I believe he delivered in producing a book that discussed the depression, discussed the recession, dug deep into history, and sadly, misused so much of it. The reality is that this 400-page book contains very little, if anything, that I agree with in terms of economic ideology and practical counsel related to the financial crisis of 2008 or the avoidance of a future crisis (even the one area we do agree on – that the Euro was a tragic mistake – comes from diabolically opposed places: His reasoning is that the Euro keeps countries from being able to print at will; mine is that the Euro begged for mal-investment and mal-behavior from day one). However, I will say that I have rarely enjoyed a book so filled with poor economic thinking. Eichengreen is a Keynesian’s Keynesian, and writes as if the fundamental tenets of Keynesianism have not been brutally undermined over the last thirty years, but he writes without the same bombastic arrogance and confrontationalism that many modern Keynesians are known for (Krugman etc.). He is gentlemanly, thorough, and frankly, wrote a pretty decent history book. As for economic analysis, though, he stayed wed to severely flawed premises, and the conclusions came out as expected.
By way of example, and there are many, Eichengreen’s fundamental purpose in writing the book is to criticize policymakers post-2008 not for anything they did, per se, but for the fact that they didn’t listen to the lessons of history enough, and failed to accelerate hard enough with the needed policy prescriptions necessary to create adequate post-crisis recovery. The prescriptions are the usual leftist bag of tricks: Greater fiscal spending from government, far greater bond purchases from a central bank, a disdain for balanced budgets, and more opportunity exploitation around low interest rates to stir up animal spirits. There is no point in writing a book to prescribe these policy solutions: They are vanilla modern Keynesian liberalism. And there is no point in me writing a review to criticize his prescriptions: They are the topics at the crux of the modern economic disagreement. However, what Eichengreen does is attempt to use the 1920’s and 1930’s as evidence that “if only policymakers had remembered …”. Ironically, he does this in crediting Bernanke over one hundred times as the great historian of the depression (and he is certainly that), and commenting ad infinitum that Bernanke’s knowledge of the depression plagues is what enabled him to do A or promote B. To Eichengreen, though, Bernanke ran into a battle of wills against other Fed governors who only knew the history of the 1970’s, and not the history of the 1930’s. Bernanke also was stuck with a national climate that became budget-obsessed, as “many non-economists are prone to do”, and committed the fatal “pre-Keynesian fallacy of equating individual budgets with government finance”.
There was a moment in the book where I would say the entire tension between Eichengreen’s neo-Keynesian leftist world and the classical market school of thought hits the road. He concedes that the Obama stimulus package of 2009 didn’t work, but comments that it worked in the 1930’s, so therefore MORE of the 2009 stimulus surely would have worked. The idea that, maybe, just maybe, the failed stimulus of 2009 is evidence that he is getting the 1930’s wrong, instead of the 1930’s meaning that our side is getting the 2009’s wrong, never occurs to him. But he walked right into that logical possibility himself! I would suggest that his book is riddled with historical data, fascinating narratives, and well-thought-out analysis, but because the most serious parts of all three were uncritically assuming of his Keynesian ideology, readers were robbed of what could have been a fascinating economic investigation.
The one entire page out of nearly four hundred that he devoted to a discussion of Fannie and Freddie’s role in the financial crisis was a disappointing giveaway to a his conclusions being formed before his investigation began. To Eichengreen, the hundreds of billions of dollars of real-life losses the American taxpayers have incurred at their hands, the role the extinction of their preferreds played one week before Lehman died, and the leverage ratios they took on (with implicit taxpayer support) that led to the government placing these bastard behemoths in receivership, were not strong evidence for their systemic significance. It was shoddy coverage, and unbecoming a work of reasonably serious scholarship.
Much debate lies ahead about the best deployment of capital in post-2008 American economics. Monetary policy’s ability to numb damage in times of distress is a legitimate topic for debate, and one that I fear virtually no progress has been made in as seven years later we wait for the slightest step towards policy normalization. That those of Eichengreen’s school of thought believe unlimited monetary and fiscal tools exist is not up for debate, though what hangover effects that reasoning entails should be. For me, this book did little to advance that debate, but provided a great and honest look at one gentleman Keynesian’s views of the past, present, and future.