The answers, if they exist, lie in the slow and painful cleaning up of balance sheets; and in microeconomic restructuring, which cannot simply be imposed from above by an omniscient planner, but requires many businesses and individuals to change their outlook and behavior. The improvement of regulation and supervision, while a good idea, is better suited to avoiding future crises than to dealing with the consequences of a catastrophe that has already occurred.
The consequence of the long academic and popular discussion of the 1929 crisis is that people have come to expect that there must be easy answers. But the collapse of Lehman Brothers last September was a 1931-like event, highly reminiscent of the world of depression economics.
Austrian and German bank collapses would not have driven the entire world from recession into depression if those countries had simply been isolated or self-contained economies. But they had built their economies on borrowed money — chiefly from the US — in the second half of the 1920s.
That dependence is analogous to the way in which money from emerging economies, mostly in Asia, flowed into the US in the 2000s, when an apparent economic miracle was based on China’s willingness to lend. The bank collapses in 1931, and last September, have shaken the confidence of the international creditor: then the US, now China.
Both lessons — about the slowness and painfulness of bank reconstruction, and about dependence on a large external provider of capital — are unpalatable.
For a long time, it was much easier to repeat the soothing mantra that the world community had collectively learned how to avoid a 1929-style collapse, and that the world’s central banks clearly showed this in 1987 or 2001.
Governments undoubtedly merit praise for stabilizing expectations and thus preventing crises from worsening. But it is misleading when officials tout simple, if not simplistic, policy proposals as the basis for hoping that we can avoid a long period of difficult economic adjustment.
Harold James is professor of history and international affairs at the Woodrow Wilson School at Princeton University and professor of history at the European University Institute, Florence.
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