Hall of Mirrors | Barry Eichengreen

Summary of: Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History
By: Barry Eichengreen


Delve into the compelling narrative of the book ‘Hall of Mirrors’ by Barry Eichengreen, where he takes you on a journey through two financial crises: The Great Depression and the Great Recession. This summary explicates the striking similarities between the two economic downturns, such as real estate bubbles, the roles played by central banks, and the often misplaced confidence in mastering the economic cycle. Eichengreen also addresses the fears of hyperinflation after the Great Recession and the noteworthy developments during this period – including the survival of the euro and EU’s monetary agreement.

Lessons Not Learned

The book dives into the similarities between the Great Depression and the Great Recession, and how policymakers’ response to the former led to the latter. Real estate bubbles and unfounded economic growth preceded both crises, and lessons from the past were not taken into account, leading to a less effective response to the Great Recession. Governments’ fear of hyperinflation led to austerity measures, which resulted in a less robust recovery. The author details how the decision to adopt the euro was the biggest failure in learning from past mistakes. Overall, the book emphasizes the importance of taking lessons from history and not making the same mistakes twice.

Fed’s Role in the 1920s Property Boom

The Federal Reserve cut rates in the 1920s to support the Bank of England, leading to a property bubble in Florida and a stock bubble in the US. Despite not taking any action to stop the bubble, the Fed raised interest rates in 1928 as stocks moved into bubble territory. While central bankers debated direct pressure to deflate the bubble, the ramshackle regulatory system of that time made it difficult. The book highlights the role of politics in hyperinflation in Germany and France, leading to investors moving their money to Wall Street and further inflating the US equities bubble. The Fed’s role in the property boom of the 1920s is explored, showcasing the limits of monetary policy in controlling irrational exuberance.

The Housing Debacle

The housing bubble that led to the Great Recession was caused by the rapid production of subprime loans, which were packaged and resold as investments. Countrywide Financial, known as the McDonald’s of mortgage banking, led the charge in automating and standardizing loans, making it easy for people with poor credit to obtain mortgages. Mortgage brokers didn’t care if the borrowers defaulted, as they had already been paid their commissions. Meanwhile, home values skyrocketed, accounting for 6% of US GDP in 2005. Countries like Spain and Ireland experienced similar booms fueled by easy access to credit. Despite warning signs, regulators failed to keep pace with the fast-paced private sector, leading to a crisis that affected not just the US, but the entire world.

The Dangers of Deflation

In the early days of the housing bubble, US central banking and politics faced the bugaboo of deflation. To avoid a potential Japanese-style economic misery, central bankers prescribed interest rate cuts. However, this resulted in low interest rates, which led to real estate speculation. Despite no one from the Fed acknowledging the cause and effect, homebuyers and investors were more willing to take risks, believing nothing would go wrong. This naivety became a common belief during both the 1920s and the early 2000s, but it proved to be wrong both times.

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