He quotes george shaw in the latest book saying if you laid all of the economist end to end they would still not reach a conclusion. People are arguing over the last financial crisis we have been through and more importantly what to do before the next one. This book has been hailed as a scholarly contribution to that debate not least in the Financial Times where it was described highly readable. That concluded this is destined to change the way we think about the Great Depression. Highly readable is probably not the strongest compliment an author can hope for but achievable for an economist. Thank you to richard waters and the Commonwealth Club of california and thank you to the members of the audience on turning out on a lovely evening when there are other things to do. You are probably thinking not another book on the financial crisis. There have been previous books on our financial crisis and we learned today there will be another book on the financial crisis appearing in october. I feel soso that my book is not the first one on the financial crisis but it will not be the last. I feel look i should explain why i felt compared to write this book. I think with the passage of time it becomes possible to put our crisis in more of a historical perspective. When we were living through it i can remember living through the events of 2008 and feeling an overwhelming sense of panic about what was happening to the Financial System. What might happen to the economy, what might happen to us. We can view those events now with a bit more detachment i think, and begin to understand how our crises fits into broader history of financial crises. And secondally i think with the passage of time secondly it becomes okay to laugh and cry over the events we witnessed. So i do deploy my somewhat goal goolish sense of humor in beginning to decribe the book. Why hall of mirrors . I wish i could claim i have that hall of mirrors in versi where there was a death burden that was relieved at the london debt conference of 1953. A set of events that is relevant today as we discuss the possibilities of germany extending debt relief to another troubled economy; greece. By hall of mirrors i had in mind the reciprocal relationship between the Great Depression of 19291933 and our Great Recession of 20082009. The book is about how the experience of the Great Depression the lessons of the Great Depression as distilled by subsi subsiquent economist and historns shaped our Great Depression and living through our own crisis and how the experience of the Great Recession will changing how we think and write and some of us teach about the Great Depression of the 1930s. It is about why recovery from the Great Recession hasnt been more complete. It is about why postcrisis financial reform hasnt been more successful and how we got into this mess in the first place. Let me start with history. History is a lens through which we by which i mean the informed public and our elected and appointed officials, view current problems. And the power of historical experience, the logic of historical aanalogy analogy is never more compelling during a crisis. Crisis is a time when there is no time for careful analytical thinking and or formal model building of the sort economist are inclined. Crises is when there is no time of testing the fitness of an economic model against data. Foreign policy specialist have long made this point pointing to the power of the munich analogy in shaping president trumans decision to intervene in korea. So i would argue the Great Recession and the Great Depression the two great financial crisis of the past century. There is absolutely no doubt that conventional wisdom about the earlier episode what are referred to as the lessons of the Great Depression powerfully shaped the response to the crisis of 20082009. In particularly, the decisions of our policymakers were powerfully informed by received wisdom about the mistakes of their predecessors. In the 1930s when the earlier crisis hit the predecessors sucombed to temptation of cutting public spending with private spents was collapsing they failed to stabilize the mun money supply, failed to supply liquidity to the bang banks and the rules was the collapse in the economy. This earlier crisis had reflected disasterous but entirely avoidable. Policy failers became convention conventional wisdom courtesy of scholarship like the monetary history of the United States in which they had a short 110 page chapter about what they called the great contraction of the 1930s. Policymakers like the chair of the president obamas council of Economic Advisory had read this book and were aware of its lessons and vowed to do better. If the failure of their predecessors are produced emergency liquidity then they would flood Emergency Assistance the banks. If failure to stabilize the money supply caused issues they would cut the balance to zero. If efforts to balance bunchts worsened the slump they would apply for a stimulus. And unemployment in the United States as a result peaked at only 10 percent. So 10 percent is painfully high but it was significantly lower than the 25 percent Unemployment Rate reached in 1933. This time failed banks numbers only in the hundreds not in the thousands as they had in the 1930s. Disfinancial was wide spread but complete collapse of Financial Markets as occurred in the 1930s when fdr shutdown the Financial System for two weeks. That complete collapse was successfully averted. And watt was true of the United States was true elsewhere. So i write every unhappy country is unhappy in their own way and there were varying degrees of unhappiness starting in 2008. A few companies not withstanding to the contrary that unhappiness did not rise to 1930 levels because policy was better. The human pain and suffering and unemployment were all less. That is the happy narrative which unfortunately i would argue is a bit too happy. A bit too easy. For one thing it is hard to square with our collective failure to anticipate the risks. This is a point that Queen Elizabeth the ii famously put to assem assembled economist in 2008. Why didnt you see it coming she asked the economist in her audience. A few of them later wrote her a letter claiming they and some of their colleagues had seen it coming. But i think if you read what those people have been writing before the facts they have been warning of a different crisis than the one we in fact suffered. A dollar crash or Something Like that. Or they had been issuing the kind of vague, nonspecific warnings that economist are prone to issuing. Even specialist on financial crisis didnt sound a lot of warning. I am supposed to be a specialist on financial crisis and on the history of financial crisis and i didnt exactly see it coming suggest adopting a somewhat less critical posture to officials in the 1920s for their failure to see it coming. Introspection of sorts also prompted me to write this book suggests our failure reflects what doctors call the subconscious tendency to think the future will resemble the past and encourages peer pressure to confirm. If you criticized Alan Greenspan as one economist did at the Federal Reserves checks and hold conference in 2005 and that reflects the power of a dominant ideaology. Policies of financial liberation that flowed from that. It reflects the revolving door between wall street and washington, d. C. In shaping the policy debate. Ultimately though i would argue that the roots of our failure to see it coming lay in the same progressive narrative of the Great Depression that i described to you before. Recall that narrative, entirely correctable correctable flaws of collective Decision Making was possible for the inability of the con contemporary to the failure coming and respond adequately. Modern day policymakers learned from that experience. Scientific central banking informed by a rigorous framework we call inflation targeting prevented the development of serious imbalances. Advances in Super Division and regulation prevented financial excess. Deposit insurance was put in place in the United States and in other countries in response to the bank panics and runs by retail depositors that caused wave after wave of Bank Failures in the 1930s. Conventional wisdom about the Great Depression that it was caused by avoidable policy failures was conducive to the belief those failures could be and indeed had been corrected, and it followed from the belief that no compriable crisis was possible now. All of which we now appreciate was dreadfully wrong. Part of the problem is we we economic and financial historians is what i mean by we had always done a better job of explaining the course of the Great Depression and how that slump became as deep and long as it did. How the depression became great than we had at explaining the onset. Part of the problem is economist are not good at understanding the Business Cycle turning. We had not written the history of the 1920s carefully enough was part of the problem. I will give you three or four observations about the 1920s and if you want to substitute the decades following the 2008 failure do so. We failed to highlight how in the 1920s rapid financial innovation combined with inadequate policies. We failed to explain how in the 1920s capital flows to one half of europe from the other half of europe for setting it up for a fall. We failed to explain how in the 1920s the naive believe that advances in scientific central banking rendered crisis a thing of the past and that was conducive to additional risk taking. So they called it the new era in the 1920s we called it the great moderation in the decade leading up to 2008. We credited inflation targeting and modern central banking. They credited the creation of the fed in 1914. Different specifics same general point. I think recent experience suggests the need to write this earlier history more carefully had we done so earlier we might have seen more clearly how the same factors were at work in the early 21st century. The faithful decision to let lea man brothers fail in 2008 what i would argue was the single biggest mistake of the 2008 crisis suggests looking at the 1920s different. They failed because the managers made bad debts. They were allowed to fail because the treasury and the feds have doubts about whether they poses to Legal Authority to rescue it. But the brothers failed because the policymakers were anxious to make a statement. They had bailed out another big investment bank, bear sterns, six months earlier. They had come in for a firestorm of criticism over that and they wanted to show they were tough and not everybody would be rescued. I think as a result of our having lived through that observed that experience, we or future historians will look at the Great Depression of the 1930s differently. We will be reminded that the banking crisis of the 1930s reflected not simply the fact that simple banks and governments didnt understand their responsibilities of lend lenders of last resort but they also wanted to make a statement and protect themselves against the political criticism for which they were subjected as a result of earlier bailouts. So the great banking crisis of early 1933 that forced fdr to close down to the entire u. S. Financial system started in michigan it started and spread to the rest of the country it started with the decision of the outgoing hoover administration, and the agency responsible, the reconstruction finance corporation, not to bail out the Guardian Group of beeping banks. That was henry fords bank. That was the family ford bank. But everybody knew where the money came from. And the decision not to bail out the Guardian Group was informed by the rfcs action six months earlier to bail out another important bank; central republic trust. A big bank in chicago. It was the family bank of charles straws. It was called the dawes bank. Charles straws was former u. S. Vice president and former president one week removed when the bailout occurred of the reconstruction corporation. So you can imagine the congressional criticism to which the rfc and the administration were subjected over that decision and they vowed in response to play tough when another big politically connected bank came to the brink in early 1933. There was also the failure to anticipate how disruptive the collapse of leeman brothers would be as well. This runs on the bank of retail depositors that we see every christmas when we watch its a wonderful life. Lehman didnt have deposits so they thought it could not cause such problems. This view informed by the decisions of the Great Depression had a variety of other implications. It is why new capital standards were set for Financial Institutions focus on commercial banks, deposit insurance focused on commercial banks and regulations focused on commercial banks that led to the ignoring of the other bank until it was too late. That focus led to the neglect of lehmans derivative position. It ignored the fact that wholesale creditors and other Financial Institutions could run on the bank and the result of which became what i described a couple minutes ago the single most serious mistake of the financial crisis. The failure of the uncontrolled lehman brothers. It was in september of 2008 that policymakers realized they had a situation on their hands and we really were on the verge of another Great Depression. So the leaders of the advances industrial countries issued a joint statement that no Important Financial Institution would be allowed to fail. Aig was bailed out and Congress Passed the tarp and one after another Central Banks flooded Financial Markets with liquidity and governments put in place multibillion stimulus plans. They did successfully avoid another Great Depression. But the results of those policies have been less than entirely successful. As you well know economic recovery in the United States has been lethargic. A couple quarters of rapid growth in the middle of last year not withstanding the u. S. Economy has expanded at only half the rate typical of the recovery of the Business Cycle. The same is true of the country in which i am living in this year. The United Kingdom and europe did worse experiencing a double dip and now a seemingly endless crisis. I would argue this is no misttry. Starting in 2010 the u. S. And the uk and Continental Europe took a right turn spending under the obama stimulus peeked and then headed downward. Congress and obama agreed to 1. 2 million in spending cuts. And 2013 was expiration of the bush tax cuts and the end of the Social Security contribution holiday. So we can have a discussion and we should have a discussion about the distributional consequences of some of these measures like letting the bush tax cuts for the wealthy expire but i think there is no question that in combination these measures took a big bite out of spending out of demand and out of economic growth. In europe that turn was more dramatic. I would not dispute that there were some countries like greece where spending was out of control and a dose of austerity was required. But the dosage to which grief has been subjected is unprecedented unemployed in history. Greece has cut taxes by what approaches 20 of the gdp. So 20 of the Greek Economy has been vaporized in the course of less than four years and it is not a surprise that greece is now experiencing a slump as deep and long as the United States experienced in the 1930s. Others follow suit and even the uk which is afforded by their own currency and central Bank Something the greeks and other europeans no longer con fpfes. Even the uk cut spending by 5 of the gpd. Central banks were anxious to end their extraordinary paul agencys as quickly as possible. In 2010 the European Central bank said they were done and started phasing out more. The ecd actually raised Interest Rates twice in 2011 when europe was still in the throws of the crisis. If you want a simple explanation for why europe experienced a doubledip is another leg down in 20112012 i dont think you have to look any further. What lessons, historical or otherwise, informed this extraordinary turn of events . For Central Banks as always deeply engrained fear of inflation and that fear was nowhere deeper in germany giving the memories of two hyperinflation after world war one was one. And then given when the spunk like struc