I blogged yesterday about the disaster in Greece, and its rapid spread to other European countries. Today the fish-eye is turning on countries outside of the PIIGS, including Japan, Britain . . . and us. According to the Financial Times, "The Fund has calculated that almost all advanced economies need to tighten fiscal policy significantly in the coming decade in order to stabilise debt at 60 per cent of national income by 2030 and the tightening needed in the US, Japan and the UK is just as bad as that required in Greece, Spain, Ireland and Portugal."
So perhaps naturally, I've been thinking more about the parallels to the Great Depression that I talked about yesterday. Arguably, the Great Depression was the first global financial crisis, infecting the developed world along with the developing. So it's interesting--and frightening--to observe the similarities between that crisis and this one.
- Excessive international capital flows trigger an initial financial crisis For a number of reasons, there was a whole lot of gold flowing into New York from abroad in the 1920s. That money turned into, among other things, margin loans and credit to fuel the Florida real estate boom. (Yes, there was a previous iteration of the current disaster). All that leverage eventually collapsed, turning a busted bubble into an international disaster.
- A second panic emerges more than a year after the initial trigger. By late 1930, people believed they had turned the corner. Things were bad, of course, but people had lived through panics before, and after the initial shock, they expected to start rebuilding.
- Fiscal crises on the periphery turn into banking crises Creditanstalt, the Austrian bank that ultimately is thought to have triggered our second bank panic when it failed, went down after acquiring a failed bank whose liabilities turned out to be more than Creditanstalt could handle. But this wasn't just a banking problem--it was a fiscal problem. Austria had a mix of fiscal problems, many of them stemming from the credit contraction, and could not afford, politically or financially, to bail out a major bank.
- Excessively tight monetary policy plays a central role There is a direct correlation between how long a country stayed on its gold standard, and how deeply it suffered during the Great Depression. Defending your currency meant high interest rates that crushed recovery.
- Bad monetary policy has international effects In the thirties, the mechanism was international gold flows; now, it is the euro.
I'm not sure how much to make of this. If you look hard enough, you can always find similarities in situations. But they are striking enough to make me wonder if they aren't part of some broad template for international banking crises. Not that I'm exactly the first person to suggest this, but the mess in Greece, and the resulting contagion, makes it seem more plausible.