Fireside Chat, Interview, Conference Presentation, Statement
MI Forum: Hall of Mirrors
- Event & Logistics: The Milken Institute hosted its first forum of 2015 on January 20th, featuring economist Barry Eichengreen discussing his book Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Misuses of History, moderated by Pulitzer Prize winner Michael Hiltzik.
- Future Programming: The Institute's next forum is scheduled for Tuesday, January 20th (note: transcript implies this date was for the upcoming event, though the current event is already underway), featuring John Hope Bryant discussing his book How the Poor Can Save Capitalism.
- Book Availability: Hall of Mirrors and other titles are available for immediate purchase from Barnes & Noble at the venue.
- Euro Crisis Mechanics: Eichengreen asserts the Euro continues to interfere with recovery by removing national central banks' ability to devalue currency or conduct autonomous monetary policy in deflationary environments.
- Monetary Union Limitations: The 1999 creation of the Euro established a monetary union without the requisite banking, fiscal, or political unions, creating a "mirage of stability" that prevented individual countries from correcting economic imbalances.
- Exit Difficulty: Unlike the Gold Standard, which countries abandoned voluntarily in the 1930s, exiting the Euro is structurally difficult ("Hotel California"), making a potential Greek exit a "shattering" and uncertain prospect.
- Misconception: Money Supply: Stabilizing the money supply and preventing bank runs, the primary lesson of the Great Depression, was insufficient for the 2008 crisis where systemic risks resided in the "shadow banking" system outside traditional depository banks.
- Misconception: Spontaneous Recovery: Eichengreen rejects the "James Grant misconception" that economies spontaneously recover if government stays out, citing evidence that the 1920–1921 recession was mild and self-correcting, whereas the Great Depression and 2008 crisis required active government intervention.
- Smoot-Hawley Tariff Re-evaluation: The tariff is historically mischaracterized as a primary cause of the Great Depression; while it created international tension, its price-increasing nature was actually counter-deflationary, and the Depression's true culprits were Federal Reserve policy, the Gold Standard, and Hoover administration errors.
- Federal Reserve Critique: The Fed is criticized for maintaining loose monetary policy before 2008, which fueled the housing bubble, and for failing to anticipate the systemic risk of Lehman Brothers' failure.
- Quantitative Easing (QE): The Fed initially hesitated on QE due to political pressure regarding its independence, but Eichengreen credits the open-ended commitment of QE3 in 2011 with contributing to subsequent economic strength.
- Reform vs. Recovery Paradox: Economic recovery must take precedence over structural reform; the success of policies that prevented a second 1930s-style collapse has paradoxically reduced the political urgency for deep financial reform.
- Housing Policy Comparison: The 1930s Home Owners' Loan Corporation (HOLC) successfully refinanced mortgages due to high down payments (50%) preventing underwater positions, whereas 2008 borrowers held low-equity, high-risk loans that created ethical and fiscal dilemmas for government bailouts.
- Keynesian Precepts: Eichengreen validates Keynesian theory that government must replace collapsing private spending during a slump, citing that fiscal stimulus worked in Nazi Germany, Mussolini's Italy, and Japan in the 1930s.
- Post-Crisis Visibility Failure: The 2008 crisis was not predicted by mainstream economists due to the "Great Moderation" illusion of stability and a historical narrative that assumed crisis prevention was "solved" by the implementation of deposit insurance, which only protected retail depositors, not systemic financial institutions.
- Lehman Brothers Decision: Allowing Lehman Brothers to fail was a policy error that caused U.S. financial markets to seize up, freezing commercial paper markets and threatening the solvency of larger institutions like Citigroup and Bank of America.
- 1920–1921 Recession Context: The 1920–1921 downturn was a minor contraction (2%) compared to the Great Depression (25% unemployment), explaining its capacity for self-correction, unlike the structural failures of the 1930s or 2008.
- Deflation Mechanics: Deflation is dangerous because it increases the real burden of debt, discourages spending as consumers wait for lower prices, and limits the central bank's ability to cut interest rates when rates are already near zero.
- Inequality & Crisis Link: While inequality poses a long-term risk to social consensus, Eichengreen attributes the 2008 crisis primarily to reckless financial deregulation and loose monetary policy rather than income inequality or affordable housing mandates.
- Data Limitations: Real-time economic data in 2008 was insufficient to gauge the crisis's severity immediately; later revisions showed the contraction was faster than initially reported, potentially delaying a more robust response.
- Fed Balance Sheet Unwinding: Eichengreen advises the Fed to unwind its $4 trillion balance sheet slowly by allowing maturing securities to run off rather than selling assets, particularly while the labor force participation remains depressed.
- Systemic Risk vs. Size: Regulators focus on bank size rather than interconnectedness because the latter is harder to measure; however, structural "weak links" in the financial chain pose a greater threat to the entire system than size alone.
- European Recovery Strategy: Europe must prioritize economic growth via ECB quantitative easing and infrastructure spending before attempting labor and product market reforms, avoiding the mistake of attempting austerity and reform without recovery.
- German Historical Bias: European policy is unduly influenced by the Weimar hyperinflation experience (fear of inflation) rather than the 1930s Great Depression (fear of unemployment), leading to excessive austerity measures.
- Forward-Looking Warning: Eichengreen concludes with the assertion that the successful containment of the 2008 crisis damage increases the likelihood of another major financial crisis occurring in less than 80 years due to insufficient long-term reform.