23 - Michael Bordo on Anna Schwartz, Financial Crises, and Life as a Monetary Historian

Episode Summary

Executive Summary: Michael Bordo traces his career in monetary history and uses historical evidence to challenge common claims about crises, deflation, and debt. He argues that inequality is not a robust driver of financial crises, that recoveries can be faster after deeper recessions, that policy uncertainty helped prolong the Great Recession, and that Canada’s stable banking system and Europe’s monetary troubles reflect deep institutional design choices.

Main Topics: Bordo’s intellectual formation in Chicago monetary economics (Priority: 5/5): He explains how Friedman, Fogel, and especially Anna Schwartz shaped his focus on monetary history, data construction, and the importance of historical narrative in macroeconomics. How monetary history research is done (Priority: 4/5): Bordo contrasts archival work with modern data access, emphasizing that historical macro work used to require extensive digging through reports and microfilm, while FRED and digitization have made much of it easier. Inequality and financial crises (Priority: 5/5): He and Chris Meisner tested Raghuram Rajan’s claim that rising inequality causes credit booms and crises, finding strong evidence for credit booms leading to crises but little evidence that inequality caused those booms. Do financial crises inevitably create slow recoveries? (Priority: 5/5): Against Reinhart-Rogoff-style claims, Bordo and coauthors find support for Friedman’s plucking model: deeper recessions can be followed by faster rebounds, and banking crises can be associated with quicker recoveries in U.S. history. Policy uncertainty and the Great Recession (Priority: 5/5): Bordo argues the slow post-2008 recovery was not inevitable; policy uncertainty, regulatory ambiguity, and some Fed errors likely restrained lending and investment more than the absence of fiscal stimulus alone. Canada’s banking stability and the U.S. contrast (Priority: 5/5): He attributes Canada’s crisis avoidance to nationwide branch banking, a simpler regulatory structure, and resistance to risky shadow-banking growth, contrasting this with U.S. unit banking and fragmented oversight. Eurozone crisis and the need for fiscal union (Priority: 5/5): Bordo applies lessons from U.S. and Canadian fiscal history to argue that a durable monetary union requires fiscal integration, no-bailout discipline, and stabilized intergovernmental transfers—conditions the Eurozone lacked. Deflation, debt, and the role of history (Priority: 4/5): He distinguishes good deflation from bad deflation, argues debt can sometimes be managed through growth and modest inflation, and warns against treating all deflation or debt reductions as inherently harmful.

Key Arguments: Historical evidence matters because many macro debates are really about institutional design, not just short-run theory. Rajan’s inequality-to-crisis story is elegant but not supported by Bordo and Meisner’s cross-country evidence; credit booms matter more directly than inequality. Financial crises do not mechanically imply slow recoveries; in U.S. data, deeper downturns can rebound faster, consistent with Friedman’s plucking model. The 2008 recovery was unusually weak because of policy uncertainty, regulatory confusion, and some monetary-policy mistakes, not because weak recoveries are universal. Canada avoided repeated banking crises because its banking structure permitted nationwide branching and its regulatory environment limited shadow banking and risk-taking. The Eurozone crisis confirmed older warnings: a monetary union without fiscal union and credible constraints on member borrowing is unstable. Deflation is not always harmful; productivity-driven or anticipated deflation can coexist with strong growth, while Depression-style deflation is the dangerous case. Excessive debt can be reduced by growth and moderate inflation, but large fiscal imbalances can ultimately force inflation or default.

Data Points: Cross-country sample: 14 countries - Used in Bordo and Meisner’s study of inequality, credit booms, and banking crises Recovery model: Plucking model - Friedman’s framework cited by Bordo to argue deeper recessions can lead to faster rebounds Annual price decline in U.S. deflation episode: 1% to 2% per year - 1879 to 1896, used to illustrate benign deflation with growth Economic growth during deflation episode: 3% to 4% per year - U.S. output growth during 1879 to 1896 despite falling prices Economic growth during later inflation episode: about the same amount - 1897 to 1914, growth remained similar despite rising prices Policy effect on growth: 0.5% - Bordo cites a paper with Dallas Fed authors finding policy uncertainty reduced post-recession growth by 0.5 percentage points Postwar U.S. debt ratio: well over 200% of GDP - Used to illustrate how high debt after World War II was reduced through growth and modest inflation Average postwar inflation: 2% to 3% per year - Approximate inflation from 1947/48 to 1961/62 in the U.S. according to Bordo Duration of relationship with Anna Schwartz: 40 years - Bordo notes decades of collaborative research with Schwartz Timeline of postwar low inflation growth period: 1947/48 to 1961/62 - Cited in discussion of debt reduction after World War II U.S. interstate branching legalization: 1990s - Bordo notes interstate branch banking only became fully permissible in the U.S. in the 1990s

Pivotal Quotes: "the first round effects were not that important. What really mattered was the amount of money that was being injected into the system." — Michael Bordo: Summarizing the lesson from his dissertation on different channels of monetary expansion "we find very strong evidence for that. We could not find any statistical evidence that the rise in bank credit, the credit boom, was caused by inequality." — Michael Bordo: Describing the results of his response to Rajan’s inequality thesis "the farther, the more you pull it down, the faster it bounces back." — Michael Bordo: Explaining Friedman’s plucking model of recessions and recoveries

Implications: The interview argues that institutional structure, policy design, and credible rules matter more than simplistic crisis narratives. For listeners, the takeaway is to judge recessions, deflation, debt, and unions through historical evidence rather than one-size-fits-all theories.