This Time Is Different: Eight Centuries of Financial Folly
Princeton University Press, Sep 11, 2009 - Business & Economics - 512 pages
Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned.
Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.
An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.
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Yes, this is not an easy read in the sense that the authors write for a lay audience. However, I managed to get through it with a basic comprehension of their exposition and their message, despite the fact that I am an amateur at economics.
One key message is that financial markets are not self-regulating. Competition for profit leads lenders to take on dangerous and ultimately deadly levels of risk, even to serial defaulting sovereigns.
Another message is that memory assets depreciate over time, leading regulators to discount the past as a guide to future pain. One of the early charts shows a 2-generation (~50 year) cycle of crisis. (This provides anecdotal support for the idea that there are Kondratieff waves of 50-60 years in economic time series.)
A technical suggestion: Figure 17.1 shows changes in Institutional Investor ratings of sovereign credit. If a country's rating is already above 90%, it has much less room to move to the upside than one with a rating of 50%. A more sensitive chart might plot changes as a percentage of the room to shift.
The authors have compiled one of the most comprehensive records of the various types of financial folly from hyperinflation to banking crises that I have ever seen. These records are in and of themselves valuable for policymakers to remind them to avoid the "this time is different" syndrome. The authors analyze the data in a broad macroeconomic way to point out when a particular financial crisis might occur. For example, they conclude that the massive influx of foreign capital into the United States prior to the current financial crisis should have been a warning flag to policymakers. From a broad prescriptive perspective, they suggest that international organizations should have better access to national economic data as well as publishing same. They lament the lack of transparency that national governments have with regard to their financial data. They further suggest that international organizations should have more power to regulate the financial affairs of nations. Although skimpy in terms of prescriptive detail, i.e. what regulatory regimes work best to manage a nation's financial affairs, the book is worth reading for the grand survey of financial folly which it describes.