This Time is Different: Eight Centuries of Financial Folly

This Time is Different: Eight Centuries of Financial FollyI proudly finished this in 2 days which is a highly detailed time series data analysis of defaults, debt crisis and our ignorance of reemerging the crises as in the book says The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. This book is the current darling of the financial set, and I understand it has become required reading by economists, bankers, policy makers and the thoughtful financial pundits alike That s a rare feat The book assembles a vast data set on financial crises, from many countries both developed and emerging, and reduces it to a mass of charts and graphs along with text The title, as you might guess, refers to the fact that this time is different always turn out to be famous last words over and over and over again Hope triumphs over experience.That said, the size of this book deterred me, as did the fact that it was already overdue at the library by the time I started it So I only read a couple of chapters on the latest Great Recession, rather than eight centuries worth of folly The follies of a single century seemed plenty enough for me.The key observations that interested me, in putting the current financial crisis in perspective, were the following data points about banking crises from the last 100 years or so Note that a banking crisis, like the one we endured in 2007 2009 and which perhaps is not done yet tends to be the severest form of economic crisis House prices drop an average of 35% and take 6 years to stabilize GDP drops roughly 10% and takes 4.5 years to recover to its pre crisis level though it took 10 years in the US and 12 years in Canada during the Great Depression Unemployment rises by 7% points above the norm, and only improves after nearly 5 years Government debt nearly doubles, rising an average of 86% Stock prices drop 56%, but recover much quickly than housing prices or unemployment in about 3.5 yearsAll in all, it looks as if the Great Recession US version we are currently enduring may be following pretty much the path outlined by these historical averages Ouch 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 Another reviewer pointed out that some of the analysis in the book is based on faulty data Be that as it may, the book still provides generic findings about the financial cycle that are still valid It is a cogent analysis of hundreds of years of financials crises Contrary to what the Fed continuously repeats, it is possible to predict financial cycles and this book proves it by examining how bubbles have burst since the invention of money It provides an excellent explanation of the predictability of the cycle, briefly stated, deregulation allowing looser lending, ballooning lending and leveraging causing a bubble that eventually bursts, and the economic chaos caused afterwards as asset prices e.g housing and other financial instruments are reset , which is shouldered by the tax payer It will help to have some academic knowledge of statistical methods to make sense of much of the analysis, although you can easily bypass the analysis and read the conclusions This book really opened my eyes to the foolishness of banks, businesses, investors and governments with respect to their borrowing It was also daunting to find significant proof that government books are usually very opaque and consciously hide significant facts about their own economies, which further fuels bubbles and the inevitable bursts What troubled me the most about what I discovered in this book is that fiat currency and growth are a given, namely, this is how the financial global system works and will continue to work I hope there are other scholars and economists who are looking at finding a financial model that is homeostatic and not geared toward continuous growth. Initial impressions well explained book Was considering giving it 4 stars or higher.Due diligence 1 star on account of irregularities in the analysis that appear to be selectively biased Data matters this study hasn t replicated well, and while we might be able to give the authors the benefit of the doubt, it is worthwhile to highlight that this due diligence has happened well before now and yet many still give this book 4 or 5 stars without knowledge that a crucial argument of the text has been found to be empty.More here here It might be unfair for me to rate this book giving it 2 stars My rating is subjective This isn t the book I was looking for, and that isn t the authors fault So please view my rating with that in mind.This book is clearly aimed at an academic or professional economic audience The book is chock full of tables and graphs The amount and quality of data is impressive.As for the writing style, Alan Greenspan would be proud Here is a typical sentence pp 192 3 Interpreting the unconditional probability of high inflation used in figure 12.5 as a rough measure of the credibility of a monetary policy gives us some insights as to why achieving low inflation is generally not a sufficient condition for a rapid decrease in the degree of dollarization namely, a country with a poor inflationary history will need to maintain inflation at low levels for a long period before it can significantly reduce the probability of another inflationary bout If that type of presentation appeals to you, then by all means put this book on your to read list.I read the entire book, although I admit to skimming some sections I really wish This Time Is Different had a Cliff Notes version I would have gotten a lot from a 25 to 50 page condensation As it is, the huge amount of detail made it difficult for me as an intelligent but casual reader to fully appreciate the main points I think the authors have a compelling story to tell But I think most readers in the general public, even those motivated to read an in depth book on this topic, are going to have a difficult time here. I gave this 2 stars, in spite of the fact that the authors played fast and lose with their data Not that it s any excuse, but I doubt that many studies would stand up to such careful scrutiny There s a lot of great information, and it s definitely a comprehensive examination of debt and default, even if they played with their numbers Ultimately, the authors fudged their data to make their conclusions seem compelling I would argue that any economist that tells you there s a 90% chance of a definite outcome is probably playing fast and loose with their data Sorry if I ve burst your bubble, but they don t call it the dismal science for nothing. I was about to say unratable Not because this book is a classic, nor because it is too scholarly for me to apprehend The reason is that I feel like it is too much like a draft The book is full of graphs, boxes, tables, albeit with quite detailed descriptions and brief explanations Put in another way, I feel like it is a preliminary analysis, where you throw out all raw materials you have, graphs, summaries, descriptives, and only with a very rough idea of what you are going to say This time is different is like that It does not, in my opinion, feature a complete, coherent, and convincing story enough.The most striking claim that these authors make is that they will prove how this time, the financial crisis in 2007 or the Great Second Contraction as they name it, is so not different from many crises in the past They plann to do this by collecting a mass amount of data, notably for the last eight centuries to prove that we humans so often ignore the past, too confident of our ability of understanding the present because of our so called advanced technologies, our superior development.I like the idea so very much Economics tends to forget about history so much The main reason is, obviously, the availability of data, which is the central part of the scientific approach with rigorous statistical calculations, mathemetics modeling and so on Yet, sadly, what these authors tried to do is still very much surrounding this scientific method This is, I think, quite impossible At best, its data from 1800s onward are acceptable, but for the remaining 6 centuries, I am afraid, the data can only be employed in descriptive, comparative, or case study method These data, simply by nature and no one s fault, are in many cases not comparable, and just not useable in statistical studies Such boasting of eight centuries is very misleading Even with the data of the last two centuries, it is problematic to tackle Yes, these authors are able to show some interesting trends, point out few curious patterns, validly call for attention in future research, but not much With such very few variables, these data can only be a sort of illustration, not really persuading me The book discusses several theories about crises in general, but makes no attempt to develop or stick to one It is perhaps beyond its scope, as it claims itself But unfortunately, my definition of books is that you have at least a theory, a story, an idea well developed to tell, not a set of proofs, for an uncertain something The only argument This time is not different is weakly supported by, again, descriptive statistics Ironically, there are many times these authors emphasize again and again the uniqueness of the 2007 crisis the only one with global scope in the post WWII period, only comparable but not fully so to the Great Depression I was like, huh Anyway, I think just by telling some historical accounts, or comparative analysis can be effective than this This book is perhaps useful for reference It is like, I don t know, another data source And yet, another blow is coming, as a data source, it is not reliable As this NY Times article written by two professors sadly annoucnes, there is a definitely serious problem in data use As a result, I could only give 1 star.What is left is nothing I feel so cheated Nevertheless, the book does discuss some theories, though very lightly Therefore, it might serve as an ok introduction to the issue of crises sovereign debt, domestic debt, inflation, currency crash It is quite a short and easy to read book, so perhaps if you have much time, you can have a look. This book s an A graduate paper glorified into 400 pages It has impressive academic rigor, an appendices reference list as long as the body, and charts galore Unfortunately it s written as blandly as Ben Stein speaks I was jazzed to find this at the library, but let down.Mercifully, in the preface the authors tell us that the book is organized so you can skip to the last 4 chapters if you re interested only with The Second Great Contraction which began in the US late 2007 They warn, however, the precursor chapters need to be comprehended so that the current financial crises can be understood in the greater sweep of financial history.I read all the chapters I ll save you time by outlining the most salient points, and then we ll call it good These points are underscored throughout the book, but they re not summarized like I present here For at least 8 centuries, financial crisis have occurred and will continue to occur despite the overwhelming prevailing feeling that This Time Is Different The current global financial crisis had all the warning signs of previous crisis, but the pervasive hubris of American bankers and lawmakers thought that This Time Is Different Governments produce sovereign external debt and internal debt, but all countries, be they emerging markets or mature markets, will default on external debt to a greater degree than internal debt Mature, established markets have defaulted as many times as emerging, unstable markets Recovery from financial crises whether from default, inflation, or currency debasement follow similar trendlines regardless of the country, the size of the crisis, or the time in history There were as many global financial crisis in the 1980s 1990s as there were at any other point in the last 200 years The current Second Great Contraction is every bit as severe, extensive, and global as The Great Depression however, the only difference today is a relatively moderate unemployment rate Financial crisis are not grouped around political turmoil or warfare, instead they can occur at any time in a country s maturation Six factors insulated policy makers from foreseeing The Second Great Contraction p 214 1 The US, with the world s most reliable system of financial regulation, the most innovative financial system, a strong political system, and the world s largest and most liquid capital markets, was special It could withstand huge capital inflows without worry 2 Rapidly emerging developing economies needed a secure place to invest their funds for diversification purposes 3 Increased global financial integration was deepening global capital markets and allowing countries to go deeper into debt 4 In addition to its other strengths, the US has superior monetary policy institutions and monetary policy makers 5 New financial instruments were allowing many new borrowers to enter mortgage markets 6 All that was happening was just a further deepening of financial globalization thanks to innovation and should not be a great source of worry The Second Great Contraction is, up til now, following established trendlines of recoveryBut I don t think so I think this contraction will prove as intractable as The Great Depression I believe unemployment will climb over 10% The Obama administration will tax the richest individuals, but US companies are considered individuals, so in essence this is a tax on all business Businesses will hoard cash and refuse to hire To cover municipal and state budget shortfalls, government workers will be laid off by the tens of thousands Those remaining will face salary freezes The Boomer demography will increasingly pull money out of markets to support retirement As mandatory spending, social entitlements will continue to put strain on federal tax revenue Countries that hold US debt in the trillions will decide whether or not to cash in to produce money for their own financial recoveries The housing market is several years from the very first tendril upticks in price Yes, folks, I think we re in for a long sideways financial floundering in the US Have a wonderful day. As almost everyone who reviews this book mentions, this is truly an impressive piece of work The authors, Carmen Reinhart and Kenneth Rogoff, have assembled an amazing history of government defaults, hyperinflations, banking crises, and currency crises for the past 800 years in dozens of countries spanning the globe They didn t, understandably, compile a narrative of these hundreds of independent events, but coded them into a massive statistical database with which they could compare the relationship of all these financial panics with each other and with numerous other stats like GDP growth and total debt The result is innumerable new insights and newsworthy conclusions I ll mention three.First, while previous researchers, who have focused on emerging market crises, have lavished attention on external defaults of government debt often to these countries First world creditors , Reinhart and Rogoff show that defaults on domestically issued debt to these countries own citizens is almost as common and almost as destructive They also showed that this domestic debt often constituted over half of all debt issued by these countries, which was often only possible because they repressed financial markets at home and limited investments at least in the post World War II period The authors also show that pre World War II and recently issued domestic debt had market level interest rates In the future, researchers will have to pay attention to this vital aspect of government finance.Second, the authors showed that the ratio of debt and deficit to GDP for sovereign defaulters could be shockingly low, often as low as 20%, and the risk of default increased drastically around the very low number of 35% of GDP This should give no comfort to those who think Italy is safe with only a 115% debt to GDP ratio and low deficits Third, they also show that around the world the governmental response to financial panics is remarkably similar, in both emerging markets and in developed countries After a crisis, on average government debt increases by 86%, no matter where the crisis took place, and most of this is not the cost of bailouts but is due to decreased tax revenue and increased expenditures Everywhere they show, governments are subject to similar constraints and similar outcomes after a crisis.These points barely scratch the surface of the authors work The book is certainly a monument to empirical insights, but I don t want to oversell it First, perhaps as befits an empirical economics text, this book is almost exclusively composed of graphs, tables, and the textual interpretation of both of those These do provide an almost inexhaustible source of new findings and hypotheses, but if that s not your bag don t go near this book though the the authors do make a real effort to make the results comprehensible even to an economic layperson Also, much of this statistical work is barely interpreted but often just presented in numerical form Conclusions drawn from it can seem a little hasty Also, although the authors emphasize the eight centuries of financial folly, the book overwhelmingly focuses on the past 200 years, and especially the last 100, so its not quite as comprehensive as some have said This is due to the nature of the evidence than the authors efforts, but it is an important qualifier.Ultimately, these quibbles can be only that This is undoubtedly one of the most important works of economic history of the past decade, and will and should be read by anyone who cares about the impact of global finance on the world and its people.

Carmen M Reinhart is the Minos A Zombanakis Professor of the International Financial System at Harvard Kennedy School

[Reading] ➿ This Time is Different: Eight Centuries of Financial Folly By Carmen M. Reinhart –
  • Hardcover
  • 460 pages
  • This Time is Different: Eight Centuries of Financial Folly
  • Carmen M. Reinhart
  • English
  • 15 July 2017
  • 9780691142166

Leave a Reply

Your email address will not be published. Required fields are marked *