on October 26, 2011
On April 15, 2013, a year and a half after I had first published this review a study by Thomas Herndon, Michael Ash, and Robert Pollin from the U of Massachusetts came out and refutted the authors main thesis that once a country reaches a Debt/GDP ratio of 90% sees its economic growth contract nearly automatically. This had become a covenant of libertarians such as Paul Ryan and Europeans promoting fiscal austerity. It turns out that Reinhart and Rogoff studies were completely wrong. R&R made numerous mistakes pointed out by the U of Mass team. The main one was to exclude three years out of the New Zealand data during a high Debt/GDP period. During those three excluded years New Zealand had grown very rapidly which contradicted R&R thesis. Once you make those corrections (including a few others that were minute by comparison), there is no statistical difference in growth rate between countries with high Debt/GDP ratio vs ones with lower ones. So much for Austerity. This is a devastating blow to what we thought was a classic study on the subject. Below see my original review. Notice that I had also observed many other flaws with their work but not the one mentioned above since I never saw the data firsthand.
This book is both fascinating and flawed. Starting with the flaws:
First, the book is mistitled. It covers the last 200 years not the last 800.
Second, their crisis framework is convoluted relative to the crystal clear framework of Charles Kindleberger in Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics). The latter leans on the seminal work of Irving Fisher The Debt-Deflation Theory of Great Depressions and Hyman Minsky (the credit cycle exacerbates the business cycle) that the authors completely ignore.
Third, some of their analyses are obfuscating. They baffle the reader on how frequently emerging market countries default with surprisingly low external debt levels. Later, the authors clarify that debt levels are far higher when including domestic debt; then the baffling turns into the self-evident.
Fourth, in Chapter 16, their development of a crisis index measure is weak with no predictive power. The first two graphs capturing this index (ranging from 1 to 5) over the past 100 years have the wrong y-axis (ranging from 0 to 180?) rendering the graph incomprehensible (pg. 253, 254). Two pages later, they use the correct scale (1 - 5).
Fifth, the graph on page 267 denoting the % collapse of exports during the Great Depression has the wrong sign.
Sixth, some of their conclusions are already outdated. They advance that Greece, Portugal, Italy, and Spain are all doing better than in recent years. The book came out in 2009; didn't those countries show signs of fiscal stress? Since 1800, Greece suffered external debt defaults or rescheduling in over 50% of the years.
Seventh, their argument that large Current Account Deficits (CADs) fuel housing bubbles is not supported. When they show the magnitude of the rise in housing prices over 2002 - 2006 for many countries (Fig. 15.1), it is unclear if there are any relationship between high CAD and housing Bubbles. The housing bubble was far greater in many former USSR satellites than anywhere else (unclear if they had high CADs).
Moving on to the ambivalent OK parts:
1) Their early warning indicators of banking and currency crises (Table 17.1) are interesting. They indicate that 12 month changes in real housing and stock prices are good early signals for banking crises. They mention other metrics such as CAD levels. But, those indicators are unsupported by any statistical analysis.
Moving on to the good parts:
1) Their prototype sequencing of crises represents their best work. It shows how a nation can experience in succession financial deregulation, banking crisis, currency crash, inflation spike, and ultimately default. The tipping point is when a government faces an untenable choice between defending its currency (restrictive policies) and shoring up its financial sector (expansive policies). Governments invariably abandon supporting their currency.
2) Their historical data facilitate interesting observations:
2a) Crisis related to sovereign risks are so frequent, you wonder how countries ever manage to raise debt. While developed countries have "graduated" from defaults, they have not from banking crises. Since 1800, the UK, US, and France have experienced 12, 13, and 15 episodes of banking crises. Banking crises have been frequent since the 1980s. Developed countries are prone to banking crises because financial deregulation is a causal factor. In 18 of 26 banking crises observed since 1970, the financial sector had been liberalized within the preceding 5 years.
2b) Post WWII financial crises have been severe. On average, real housing prices decline by 35% over 6 years; stocks crash by 56% over 3.5 years; unemployment rate increases by 7 percentage points; GDP contracts by 9%; and, public debt rises by 86%.
2c) The US Subprime crisis was more severe than any other post WWII financial crisis. Its housing and stock market bubbles were more pronounced. The US CAD as a % of GDP was larger. The downturn in GDP was more severe. The resulting increase in public debt was faster. The ramp up of all mentioned indicators suggested a financial crisis was imminent. The authors remark that if the US had been an emerging market relying on external debt (in foreign currency), the US dollar value would have plummeted and interest rates soared.
3) When the authors move on to the US Subprime crisis, they note how the majority of experts, including Bernanke and Greenspan, were not concerned regarding the rising US Current Account Deficit (CAD) and rising housing prices. These experts stated the CAD and home price increases were associated with a World savings glut resulting from Asian export led economies. Meanwhile others (Rubini, Krugman, and the authors) were concerned about the CAD sustainability (absorbing 2/3d of World savings), housing prices (in real term rose by 92% between 1996 and 2006 or more than 3 x the 27% increase from 1890 to 1996! See graph pg. 207) and the massive increase in US household debt (rose from a norm of 80% of personal income to 130% by 2006).
If you are interested in this subject, I also recommend Raghuram Rajan's Fault Lines: How Hidden Fractures Still Threaten the World Economy [New in Paper].
on December 9, 2009
When I purchased this book I was expecting to learn about the various financial crisis through out history and the psycholgy that lead up to the crisis. Instead I read a book that was mostly data. Half of the book consists of tables and graphs, another 25 percent explains how the data was collected, and the last 25 percent explains what the data means. The main points I took away from the book are the following:
1. Devaluing a currency is a form of default.
2. Countries in their initial and middle stages of development frequently default on their debt, while advance countries rarely, if ever default on debt, but if they do default they will devalue their currency, which will cause inflation.
3. Banking crisis are usually cased by large drops in home values.
4. It takes years for a country's economy to recover from a banking crisis.
5. During a banking crisis government debt will usually grow on average by 86 percent.
If you are an economics professor who loves to look at data you may enjoy this book, but the average reader will not.
on June 17, 2010
This history of 800 years of financial crises is based on the premise that financial mistakes can be understood by looking at numbers and little else.
There are no human beings in this book, only state actors as participants in the financial markets. (Some early modern monarchs are named, but only in their capacity as government executives.)
The authors accumulated a lot of data, much of which, they say, has never before been gathered and analyzed. Their data are exclusively financial -- debt, GDP per capita, government defaults, house prices, etc. There is no analysis of changing political systems (during the period covered by the book France, for example, went from absolute monarchy to revolutionary Directorate to Napoleonic dictatorship to monarchy to unstable republic to slightly less unstable presidential republic, and other countries have undergone similarly huge political changes in 800 years).
If you suspect that changes over time in each country, and comparative changes and differences between countries, in relative affluence, income distribution and income inequality, the identities of participants in the financial markets, the distribution of political power and the prevailing political ideologies, and each culture's and sub-culture's attitudes toward consumption, debt, and saving (such as between 21st century Germany and Greece), this book won't advance your understanding of how those non-quantitative factors affect the probability that a country's banking system will shudder or that the country will default on its debts to foreigners and (or) on its debts to its residents.
Of course, such messy things as political systems, cultural attitudes and behaviors, and the socioeconomic characteristics of financial market participants aren't reducible to numbers, and gathering such "data" would take unreasonable amounts of time, money, and wisdom. But the book blithely proceeds on the assumption that the analysis works with graphs and tables of apples or oranges or whatever supports the thesis. The book's charts and figures are usually more ambiguous, less certain than the accompanying text. The ambiguities and uncertainties are surely attributable to the lack of analysis of political and social factors not included in the authors' database.
The title is an intentionally ironic comment on the popular delusion in every outburst of financially irrational exuberance that "this time is different." The authors try to show that of course this time isn't different -- just look at how quantitatively similar crises unfolded 20 or 200 or 500 years ago.
The verdict on their case is "not proven" -- comparing 21st century financial markets, national economies, political systems, societies, and government fiscal behaviors and monetary policies with 17th century monarchies is just silly.
Sometimes the authors want to have it both ways. They say, "The connection between stock prices and future economic activity is hardly new" (p. 262), and they devote a page to fortifying that argument. Yet only 12 pages earlier they say, "False signal flares from the equity market are, of course, familiar. As Samuelson famously noted, 'The stock market has predicted nine of the last five recessions.' Indeed, although global stock markets continued to plummet during the first part of 2009 (past the end date of our core data set), they then rose markedly in the second quarter of the year, though they hardly returned to their precrisis level." (Page 250 or page 262? You pays your money and you takes your choice.)
Financial journalists have praised this book to the skies and beyond; they are the same financial journalists who persist in attributing the behavior of financial markets to "investors" even though they know, in another part of their mind behind some impenetrable firewall, that two-thirds or more of all financial market activity is driven by computers programmed to make a fast buck, nothing more. Numerical data are easy to understand, easy to deal with. That doesn't mean they tell you anything worthwhile about what's going to happen tomorrow, because the next time will be different -- different politics, different societies, different cultures, different markets.
on March 7, 2010
Glossed over history of financial crisis with large emphasis on number recitation, some of which are repeated 3,4 times. Some important insights are the same ones from previous books, now being supported by more numbers. But NUMBERS DON'T TELL YOU THE FULL STORY OF WHAT HAPPENED AND WHY, which is the biggest part of what is missing from the book.
Contents organized by types of crisis, so different aspects of the same crisis got analyzed separately (usually concisely instead of more in-depth), making it hard to understand their interaction. From reading I don't get a feeling that the authors are deep enough in financial history to reveal more causal relationships.
Wording is aimed more at demonstration of sophistication than making knowledge understandable. Long sentences and repeated self-exaltation make it hard for the reader to keep focused.
on March 29, 2010
I hated this book. I am an economist, so it was not that the material was over my head. The authors spend way too much time telling the reader,"We are going to show you shortly...." That is crap filler. Almost certainly, neither author would accept this from an undergraduate student, let alone a graduate student. So, why should the reader have to face it? Both need to take a freshman 101 class in writing.
Also shame on the editor for allowing it to stand. Nothing in the book is earth shatttering or overly technical, so why tire the reading with unnecessary prose?
on December 15, 2015
I picked up this book based an a reference by an LA Times financial columnist that I respect.
However, it was a big disappointment. I agree with points made by many of the 1, 2, and 3 star reviewers: This book should be described as technical and academic, and not good for the general reader.
Several reviewers with extensive training in economics, etc., have commented on the poor writing style. The authors spend way too much time telling us what they are going to do, so there is a lot of redundant "filler," the kind an underclassman might use to reach a minimum word or page count requirement on a term paper! Another strange feature: the authors think they are very clever by not having a glossary, but instead have a chapter of detailed, rambling definitions that really should be shortened and placed in an alphabetized glossary.
on December 31, 2012
Like many academic books it states the conclusion in the forward and takes another 200-300 pages to go into excruciating detail to prove the conclusions (which are not earth shattering) that it stated at the start of the book. At best it should be scanned.
on July 8, 2015
I had high hopes for this book as I had seen interviews with Ken Rogoff and for the most part he gives clear explanations. However, this is book is incredibly poorly written. I think it is a good first draft, but should have gone through some major revisions before being published.
This review is for the audio version. The main problem is that the book is incredibly scattered. If he would stick with one topic at a time and treat that topic in-depth, it would be acceptable. But the audio is constantly interrupted by off-topic things with sentences like, "but this will be treated in chapter 4 and that will be treated in chapter 16, and for x look to chapter 5." There are frequent mentions of the appendix and what is there. There are frequent mentions about limitations of various sorts of data. My question is, why not treat the data limitations of each kind of data in its respective chapter?? And why not clearly outline the contents of each chapter in the introduction instead of peppering it throughout the book?
He keeps on making the mistake of introducing terms and not explaining what they mean until later on in the book. As it's an audiobook I cannot scroll back and forth. As an example in the beginning section on debt, he defines the various kinds of debt. When discussing the 4th type of debt, he mentions something I did not understand. Then he moves on to the 5th type of debt, which is what he mentioned in the 4th type of debt. Why didn't he mention that first? Unfortunately it was still not understandable in the 5th type, why couldn't he have used an example?
The English is very stilted and boring. This work looks Charles Wheelen's economics book look magnificent by comparison. And I by no means have a rudimentary background in economics. I took a number of economics courses in university from some top professors and am extremely good at math, in addition have done independent study since that time.
Another mistake he makes is to repeat points over and over again. Eg, he states in the introduction that he will call the 2008 crash the "second great correction." He makes the same statement in the next chapter. If he had cut out all of the excess stuff the book would be much smaller. Eg, the introduction is 4 times too long and is not understandable because it is full of terms that he doesn't define until much later in the book. Some things are glossed over very quickly in the audiobook which could have been explained more. I don't think much thought was given to the fact that all the tables, etc are missing in the audiobook.
The organization is poor, especially because of the discursive text.
I am returning the audiobook. I don't recommend that anyone gets it. I might get the text at some point when I will have time to read it as then I can google terms, read the chapters out of order, etc, but I am not optimistic based on the audiobook. I might look for individual other works that go over banking crises, currency crises, sovereign defaults, and so forth.
on March 26, 2010
I had high hopes for this book. However, I found it difficult to read. It's packed with statistics that perhaps a person who enjoys econometrics might enjoy, but I found their prevalence to be distracting.
The central message seemed to be that as the generations die out the economic mistakes are repeated. I also learned that nation-state default on debt is more common than I thought. The two methods mentioned were outright repudiation of past debt, (Russia), or just printing money so inflation accelerates and the old debt looks smaller.
I enjoy books that enlighten me through the quality of their thoughts and the method of their narrative. This book did a good job on the former, not so much on the latter.
on March 18, 2012
First off, let me say what I love about this book. That it is full of data, graphs, and that it takes a long view of history. It includes lots of data sources -- one-third of the book is comprised of appendices, which I see as a plus. Another large segment of the book simply describes the data set, and describes how the data was catalogued and categorized.
Secondly, I can confirm that this is a fairly dry text. A beach read, this is not. Should probably look to get a double-espresso before even cracking the thing open.
Given the first two comments above, I think this book is of the most use to Economic Historians doing research in the field, who want to have a quick reference for data sources from various periods, or looking for various episodes to study. This is not a gripping account of the Great Depression, the LTCM collapse, the Asian Financial Crisis, and the Great Recession all rolled into one.
This book also does not provide useful analysis for policy purposes. Perhaps because of the broad focus -- eight centuries -- the book does a poor job discussing the major financial crisis of the past 100 years. Namely, the book does an exceedingly poor job with the Great Depression, the Asian Financial Crisis, Japan, and the Great Recession. While I liked the book overall, perhaps because the publishers were on the authors to write quickly, the book is filled to the brim with howlers -- it says the US stock market only declined 55% during the Great Depression (which must be wrong, since the DJIA fell closer to 90%) -- but elsewhere in the book it says the average stock market decline in the entire world was also 55%, which I would expect to be lower than the decline from the US (suspicious both are the same). This raises another point about the usefulness of one of the central exercises of the book, which is to report the average impact of financial crises on GDP, unemployment, and stock and real estate markets, and other economic variables, since the choice of which countries and crises to include in those averages is somewhat arbitrary. Reporting averages can be interesting, but can also be meaningless or even misleading. The authors did not do an effective job discriminating.
Another quibble: the authors assert that the decline in trade during the Great Depression came in part because countries left the gold standard and devalued. This could not be any more wrong. In fact, once countries devalued they began to recover, and trade increased. The trade decline they document happened up until the devaluation; it was not caused by it. When they cover public debt during the Great Depression, they respond that the reason that public debt didn't respond more was that the government response was slow. In fact, in the US case at least, the reason public debt didn't grow more quickly was not because the government didn't respond quickly enough, but rather because Hoover believed that the government needed to balance the budget and stay on the gold standard, and so raised taxes and cut spending rather quickly. The authors write that today, governments responded more quickly, but then follow that with the worst sentence in the entire book by questioning government's stimulus (fiscal and monetary) by writing that we "we would be wise not to push too far the conceit that we are smarter than our predecessors".
And, the insights that the book does get right are minor and of secondary importance. One of their central findings, found in the last chapter on policy responses, is that "Having a complete picture of government indebtedness is critical". Thank you for the trenchant insight, Mr. Obvious. At the same time, the authors make it sound as though there is nothing, not even sound regulation, that countries can do to prevent financial or banking crises. They just happen. And once they happen, they are deep and last awhile. Not much anybody can do. Thanks, in part, to the lack of policy insight in this book, I suspect next time won't be different either.