Monday, February 16, 2015

My Amazon Review of Barry Eichengreen’s “Hall of Mirrors: The Great Depression. The Great Recession and the Uses-and Misuses-of History

Barry Eichengreen, an economics professor at UC-Berkeley, is a scholar of the first order on The Great Depression. His “Golden Fetters” on how the operation of the gold standard during the inter-war years was a significant cause of The Great Depression is a classic. He argues in the Keynesian tradition on what the crisis managers of 2008 learned, perhaps too well, the lessons of 1929-33. Thus readers who prefer the views of James Grant’s “Forgotten Depression…” will differ greatly with this history.

The analogues between the 1920’s and 30’s with the 2000’s are many. Here are only a few highlighted by Eichengreen:
·        *Bernie Madoff was the equivalent of Charles Ponzi.
·        *The Euro of today works the way the gold standard of the 20’s worked.
·        *The bailout of the Dawes Bank (Central Republic Trust) was similar to the Bear Stearns bailout.
·       * Letting Lehman fail was analogous to the moral hazard issue associated with allowing the Ford controlled Guardian Group of Banks to fail in 1933.
·        *There were real estate booms in both eras.

The lessons our modern day policy makers learned were to flood the system with liquidity, bailout the banks, engage in fiscal stimulus policies, avoid protectionism and avoid debacles like the London Economic Conference of 1933 through international cooperation. However, unlike the 1930s the problem in the system was not really in the banks, but rather in the shadow banking system that grew up in the 1990’s and reached full adulthood in the 2000’s.

Perhaps more important instead of four years of grinding lower in the 1930’s the economy began to recover after two years and most governments and central banks began to pull back on stimulus policies which in Eichengreen’s opinion is the reason for the slow growth the global economy has experienced since 2010. Further by preventing another Great Depression the impetus to fully reform the financial system waned and we ended up with a watered down version of financial reform with Dodd-Frank. Eichengreen is a reformer in the Polanyi tradition. Unfortunately as Keynes contemporaneously noted reform is the enemy of recovery. Reform took place in the 1930’s because the old order collapsed, but as many have noted the New Deal reforms delayed recovery. Even Eichengreen concedes that National Industrial Recovery Act of 1933 was an economic disaster.

In reading Eichengreen’s book one has to sympathize with the policy makers of the early Great Depression. They were operating in real time with inadequate information, much as Bernanke et al were doing in 2008. Eichengreen is sympathetic to New York Fed President George Harrison’s “direct pressure” approach to the stock market boom which he characterizes as an early version of “macro-prudential” policies. Unfortunately “macro-prudential” policies have yet to be tested and I suspect they might have failed in the 2000’s in halting the sup-prime mortgage boom. Why? The policy makers would have been accused of racism by preventing Blacks and Latinos from buying homes.

I have a few factual quibbles with the book. He understates the role of Hoover Treasury Secretary Ogden Mills in being the true author of Roosevelt’s early banking reforms; he fails to note the importance of the fiscal drag or tax on labor, depending on your point of view, of the introduction of Social Security taxes in 1936 without benefits being paid out until 1939. Remember at the time social security was not included in the federal budget. Lastly he sometimes confuses being long a credit default swap with being short the swap.

All told Eichengreen has written an excellent book, especially The Great Depression portion. However, because it is probably too long and towards the end he pontificates too much on the Europe of the past years, which is too recent for real history, I give the book four stars not five.

The Amazon Review appears at the following url:

Sunday, February 8, 2015

Putin's Ukrainian Salami

Vladimir Putin is devouring Ukraine like a salami, one slice at a time. The first slice was Crimea and the West stood idle. The next two slices were Donetsk and Luhansk and currently on the block is the port city of Mariupol. Putin uses his army with advanced weaponry cloaked in the garb of insurgents to give the veneer of deniability. But make no mistake Russian imperialism is on the march and if the current passivity of the West continues, it won't be long until the whole of Ukraine is gobbled up one slice at a time. And where is the West?

With Germany's Merkel opposed to the shipping of offensive weapons and the Obama Administration operating in their usual dazed and confused mode, the world watches as western oriented Ukrainians spill blood every day. Simply put the West is nowhere. All talk and very little action. It is high time that the Obama Administration wakes up from it stupor and start to ship advanced weaponry to the embattled Kiev government. Concurrently the West should amp up its sanctions regime to cut Russia off from the the international banking system one big slice at a time.