Ever since the business cycle replaced the seasons as the prime driver of economic life, mankind has learnt to adapt to the inevitability of booms and busts. Yet, just as our farming ancestors struggled to cope with extreme weather, large-scale financial crises have repeatedly caught industrial and postindustrial societies off guard. Policy makers have had to dig deep into the past for lessons as they sought to contain bank runs and fight soaring unemployment.
The Great Recession has been no exception. After the largely benign economic fluctuations of the 1990s and early 2000s, central bankers were stunned by the financial crisis that struck in 2007-08. Their immediate instinct was to look back 80 years, to the upheavals of the Great Depression.
In Hall of Mirrors, Barry Eichengreen, a professor of economics at the University of California, Berkeley, argues that knowledge of what happened in the 1930s has been a mixed blessing for today’s policy makers. Hindsight allowed politicians and central bankers to avoid many of the errors made by their predecessors, sparing the world a more dramatic crisis. But Eichengreen also believes that the success of the initial response meant the reform effort stopped halfway. This has left the west vulnerable to a new financial shock.
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