Echo Chamber

President Barack Obama claims credit for the recent spate of good economic news.   Senate Majority Leader Mitch McConnell says, “The uptick appears to coincide with the biggest political change of the Obama administration’s long tenure in Washington: the expectation of a new Republican Congress.” The argument illustrates an important but little-recognized fact of life.

Whenever history is written in haste, political narrative tends to dominate the underlying economic story.  A case in point is Hall of Mirrors: The Great Depression, the Great Recession, and the Uses — and Misuses – of History,  by Barry Eichengreen, of the University of California at Berkeley.

Many people have noted the resemblance between  the “Roaring Twenties,” meaning the eleven years between the end of World War I and the stock market crash that began in October 1929; and the globalization of the 1980s and ’90s, including the Internet boom and the war years of the Early Twos, culminating in the financial crisis of 2008.

Eichengreen, an authority on the international monetary system — he is  the author of Golden Fetters: The Gold Standard and the Great Depression 1919-1939 (Oxford, 1996) and Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford, 2011) — set out to compare the two crises, eighty years apart.

The result is an entertaining chronicle of the two episodes that nevertheless fails to persuade.

Eichengreen’s conclusion: that in 2008, the good was the enemy of the best. Central bankers might have prevented a Great Depression, he writes, but “their very success in preventing a 1930s-like economic collapse led to their failure to support a more vigorous recovery.”

If this sounds like the analogies that Obama’s advisers sought to draw  between his administration and that of Franklin Roosevelt in 1933, it is because it differs little from the politically-motivated story that they told.

The two chapters on the panic that began after Lehman Brothers was allowed to fail are especially disappointing.  Sale and repurchase agreements aren’t even mentioned, although a run on “repo” was at the center of events.

More to the point, there’s almost no hint that the worst phase of the crisis had been resolved by the time that Obama was elected.  Much remained to be done, of course, but George W. Bush, working with Congress, and two key appointees — Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson  – stopped the run. Few other Republicans would have done so.

When Eichengreen gave his presidential address to the Economic History Association in 2011, there was reason to hope that he would produce a study employing several different lenses instead of just one.  His topic was a promising one: the use of analogies to shape policy.

Though the Great Depression had become “the dominant base case” in discussions of the 2008-9 crisis, he said, there were other analogies that illuminated various aspects of events:  the crisis of 1873, driven by an investment boom and bust that resembled that of 2007-8; or the 1907 crisis, in which the panic centered on the trust companies, the “shadow banks” of their day.

He didn’t deliver.  If I sound cranky it’s because I am.  It’s too soon to write the history of 2008.  Better to wait for Bernanke’s account of what happened, and the histories that will be written after.

It’s only natural for politicians like Obama and McConnell to construct simple stories of their own great deeds. We look to economists and historians to peer more deeply into past and present.

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