It may be summer, but economists and others are going back to school to learn more history.
Millions of words have now been written about the 2007–2009 financial crisis and the “Great Recession.” A recurring trend in all of this writing is the additional use of historical references.
A perhaps unsurprising conclusion from these writers is the famous prophecy that we failed to learn from history and we are doomed to repeat it.
Valid criticism was placed on the economics profession for failing to accurately forecast the financial problems and the resulting strong recession. Economists and policymakers alike frequently said “it’s different this time,” But history lessons are now teaching everyone that it really isn’t any different. The causes and consequences of the banking panic are scarily similar to previous episodes.
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Popular books on the financial crisis today use historical evidence to show how growing debt and a growing banking sector always lead to financial panics like that we experienced. Further, the historical record suggests the current policy responses are similar and we are doomed to repeat ourselves.
Carmen Reinhart and Kenneth Rogoff use a large data set to show how much things stay the same. The Atlantic lists their book, This Time is Different: Eight Centuries of Financial Folly, as a runner up for 2009 book of the year. Reviewing more than 800 years of data from 66 countries, these economists found that financial crises are always the result of the same problem — high levels of public or private debt.
Evidence from this long history also shows that policy responses are predictable. When the prices finally stop rising in housing, commodities, and many other assets, investors panic and government deficits rise with a banking industry bailout in one form or another.
A title on The New York Times list of the top-selling business texts, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, by Simon Johnson and James Kwak, follows the growth of our banking system from an early debate between Jefferson and Hamilton to the current political and economic power of this industry that watered down the financial regulation bill now being debated in the U.S. Senate. Jefferson was leery of a strong banking sector, and Johnson and Kwak’s history lesson shows us he was right to be concerned.
Many of today’s policymakers are reading more history and trying to make use of it. In a speech to bankers last month, Richard Fisher, president of the Federal Reserve Bank of Dallas, suggested the we are not only failing to learn from history but suffering from what he calls financial dementia. Fisher thoroughly reviews the history of U.S. banking regulation since 1864 and argues it is “not a distinguished one.”
Along with the books cited above, Fisher shows that past and current policy responses to financial crises change the regulations but do nothing to address an oversized banking sector and excess use of debt. The problem of too-big-to-fail banks and the incentive for bailouts are never removed.
Writing for The Wall Street Journal this week, Eugene White, a professor of economics at Rutgers University, uses a dialogue from 1893 between Sens. William Jennings Bryan and Nicholas N. Cox to argue that even current proposals to increase taxes on the banking industry are nothing new and no more likely to be successful today. Bryan’s proposal to tax safe banks in order to protect our economy from risky ones was rejected at the time and may have made the next panic, which occurred in 1907, even worse.
Finance and economics professors like myself would do well to put more history books on our reading lists.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.