on October 3, 2009
Rogoff and Reinhart, two very substantive (and, I might add, earnest) economists, have produced a prodigious work which will be read and studied for years. They have gathered mountains of data from primary and secondary sources and reduced it to dozens of charts and graphs, a heroic work in its own right. Their intention, God bless 'em, is to lay out the follies that have led to economic/financial crises over the last eight centuries. Their findings: humans have not learned from past mistakes. The title is ironic and is worthy of Peter DeVries.
The authors say it is "almost comical" that no governments reveal their true financial condition today, nor have they done so in the past. The lack of transparency and the shenanigans that go on behind the curtains contribute, of course, to the human suffering that ensues in crisis after crisis.
One needs to find this book comical if one is not to slip into a permanent depression about the utter failure of national leaders to address shortcomings in national domestic and foreign economic policies in order to avoid systemic crises. No one has, from the 13th century onward, anywhere in the world.
The authors persist in saying that they hope their monumental effort will lead to an examination by policymakers of past mistakes and help them avoid future mistakes. I say, "Good luck with that." In my opinion, this book ranks with the complete works of Shakespeare in illuminating the human condition. Or Bruegel, or Beethoven. It will not bring about change, but it will entertain in a deeply satisfying way.
on October 24, 2009
Be prepared for a very sobering and complete review of eight centuries of financial crises, complete with charts and graphs that even those who fell asleep in the Macro 101 in college should be able to understand. This book is worth reading in its entirety, but chapters 13 to 17, in which the authors draw important lessons from the 800 years of financial folly for the present course of the "Second Great Contraction of 2007" and its aftermath, make this volume well worth the price.
Also, be prepared for some sobering analysis of the effectiveness of central banks and government policymakers in addressing economic crisis (yes, regrettably, still not very effective even with the benefit of 800 years of history and analysis to draw on). You will learn why This Time is Ultimately Not That Different in so many ways. Carmen Reinhart is a brilliant economist and Ken Rogoff worked at both the Fed and the IMF so they are in a unique position to evaluate the global scope of the 2nd Great Depression in modern history, and it is the very global nature of this event that leads them to conclude that the aftermath with be long-lasting and have profound effects on the global economy for many years to come.
While documenting the fiscal policy response to the Second Great Contraction of 2007, including the massive global government bailouts in the banking sector, Reinhart and Rogoff point out that the size and long-term impact of these measures, while profound, may be dwarfed by the effects on the U.S. national deficit and national debt of reduced Federal tax revenues during the global downturn. With such high levels of debt and limited means to reduce government expenditures to compensate for sharp reductions in tax revenues, the ultimate effect may be a debasing of the U.S. dollar by the Fed, producing a period of increased inflation or stagflation.
The earlier chapters describing periods of hyperinflation, bank and sovereign defaults throughout history are fascinating, leading up to the payoff in the final chapters, in which one can draw one's own conclusions about what course this most recent crisis will take and just as importantly, how policymakers are liable to miscalculate once again. The Federal money-printing presses around the world are in high gear once again, more automated and sophisticated than ancient regal sovereigns clipping coins and extracting gold and silver from the royal coinage to finance their realms.
Proving once again that history doesn't always repeat itself, but it does rhyme.
"This Time Is Different" presents a quantitative history of financial crises -debt crises, bank crises, currency crises, inflation crises- with an eye to commonalities in the run-ups and aftermaths of these crises. Of course the authors' point is the reverse of the book's title: this time is never different. Economists Carmen M. Reinhart and Kenneth B. Rogoff demonstrate that financial crises have a lot in common, regardless of when and where they take place, by showing us the data. The obvious conclusion would be that financial crises are predictable. Although they state that "it is beyond the scope of this book to engage in a full-fledged analysis of early warning systems," the authors present much of the information that would be required to develop a predictive model.
Whether it's predictive value is fool-proof or not, I was fascinated by the data and analyses. The authors have pulled together an unprecedented amount of data for various types of financial crises over a period of centuries. They found it particularly difficult to find reliable data on domestic debt, which they call "an exercise in archeology", but managed to uncover enough to claim that domestic debt is the vital piece of missing information in understanding debt intolerance. Reinhart and Rogoff use data on 66 countries that account for 90% of world GDP over nearly 8 centuries, with an emphasis on the past 2 centuries, for which they have the most data (and which had the most crises).
"This Time Is Different" has 6 parts but it effectively has 3 topics: sovereign and domestic debt and default, banking crises with some forays into inflation and currency crises, and the current global financial crisis, otherwise known as the Second Great Contraction. Looking at the charts, it's clear that serial default is historically the norm. And, though advanced economies may outgrow patterns of default, they never outgrow banking crises, which are surprisingly similar in their causes and duration in advanced and emerging market economies. Up to this point, the authors generally use data from the past 2 centuries. It is only in the chapter on default through debasement that they include the past 8 centuries.
The chapters dedicated to the US subprime crisis and Second Great Contraction draw on data since 1900 only. The authors attempt to develop benchmarks for gauging the severity and duration of a crisis based on data from past crises. This is the most opinionated section of the book, even though the authors' views are empirical. They present both sides of the argument for and against the housing boom and large US account deficits, but Reinhart and Rogoff conclude that rising asset prices, slowing productivity, large current account deficits, and sustained public and private debt build-ups create, if not a looming crisis, an accident waiting to happen. They admit, however, that it would have been difficult for policy makers to act in time even if they had seen it the current crisis coming.
"This Time Is Different" seems to have been written both for economists and interested laypeople. It's packed with data, easy to understand, but sometimes repetitive or more verbose than necessary. It looks like each part was intended to be relatively self-contained so that readers may study them separately, but this makes for repetition. I found this mildly annoying. Then again, the repetition may be helpful when I use the book as a reference later. The style is a quibble, but the information within is engrossing. I was not even tempted to give any of the graphs a quick glance. I was interested in every one.
on October 29, 2009
When one reads the book, the first impression is the incredible amount of work the authors put into collecting the most comprehensive, as of today, dataset on financial crises and key economic variables for not only developed but also developing countries. This dataset will most definitely be at the heart of future empirical work on financial crises.
It will discipline economists to strive to build more realistic models that are able to reproduce the systematic trends and fluctuations of economic variables around the period of financial crises. As the authors admit to be surprised themselves, not only such systematic relationships abound across time but also across developed and developing countries.
The book is an important reminder that it is easy to live under the illusion that "this time is different" and that developed countries have outgrown severe financial crises. However, as the current financial crisis reminded us the more we lie to ourselves, the less vigilant we are as to potential worst case scenarios.
Finally, speaking of vigilance, the book is not only a thorough description of the past but also hints at a very serious problem many countries including the US would most likely face in the future; namely, the issuance of unsustainable levels of government debt which could have tremendous negative medium and long run effects at a global level.
on October 11, 2009
As Martin Wolf from Financial Times has written... "A MASTERPIECE"
One of the most interesting things about this books is that it combines a very rigorous research on the topic while keeping it accessible to a large audience. The book is self-contained, with definitions provided along the way, which makes it easy for people with no previous knowledge in economics to enjoy and understand it.
The authors also put together a database without precedents in the area which not only makes their statements much stronger, but also makes a great contribution to the field.
on October 9, 2011
1. This book has quickly become one of the standard references for discussions regarding the causes, progression and long-term effects of financial crises.
2. In the sense that the authors' discussions and conclusions are well researched, this book is scholarly. It is not light reading, although the intelligent lay reader will do fine.
3. The authors have a sense of humor, which makes reading this book a little easier. Their humor starts with the title of the book, which is not to be taken literally.
4. With the various forms of financial crisis present in many parts of the world, the book is clearly topical.
5. The main part of the book, which is only about 290 pages, can be read and understood in a reasonable amount of time.
6. The book's charts and tables distill a lot of information into relatively short spaces. The charts and tables are imbedded into the main text and into detailed, separate data appendixes.
7. The book does not promote simplistic, one size fits all, solutions. The economic world, after all, is complicated.
8. The roots of the present lie deep in the past. An understanding of the common problems and policy mistakes of earlier financial crises can help citizens and policymakers make better policy choices.
9. The book is blessedly non-partisan.
10. It is too early to tell for sure, but I suspect that this book, alongside works that have stood the test of time, will become a classic in the field of financial crises.
This book is one of the most complete reviews of financial crises over the last 800 years that I have seen.
After the Crash of 2008, some of the Lessons Learned from past crises would seem to apply today. For example, how do countries stay out of country related financial crises?
The secret to keeping your country out of trouble is to first live below your means, meaning running a surplus each year. Second is to borrow as little as possible and to fund the debt with maturities over 10 years. Third is to have no hidden off-the-balance sheet guaranties.
How to get your country into trouble is to run a deficit every year, borrow short term to fund the debt, and have a lot of hidden off-the-balance sheet guaranties.
The authors divide past financial crises into many categories including inflation, currency crashes, debasement, serial default, this time is different, banking crises, and external/domestic defaults.
Some of the summary statistics from past financial crises include:
Average house price decline of 36% with 2008 sub-prime being 30% and 1929 of 12%.
Average time for home prices to recover of 6 years.
Average stock market decline of 56% with 3.4 years to recover.
Unemployment usually rises by an average of 7%. In the U.S., before 2008 was 4% and it is now at 10%. The 1929 Great Depression increase was 20% over the base rate.
Average GDP declines of 9.3% and peak to trough of 1.9 years.
The authors point out that bubbles are much more dangerous when they are fueled by debt (2008 Sub-prime crises) than not funded by debt (2000 Tech Wreck).
There has been 5 big bank crises since 1945 plus the 2008 Sub-Prime fiasco. This means a major banking crisis every 11 years (6 crises in 65 years). The once every 11 year banking crisis is the same order of magnitude as stock market crashes in the U.S. with 8 Bear markets since 1945 or once every 8 years (8 Bears in 65 years).
The authors found that a banking crisis is the worst kind of crash. They found that real housing price bubbles were the best predictors of banking crises. Annual deficits and stock markets were not good predictors of banking crises because they give too many false alarms.
One astounding finding to me was that government debt usually almost doubles (86% increase) after a banking crisis. It seems like the U.S. is on track to exceed the historical average in this category.
Why have banks managed to create their own crisis about once every 11 years? The authors theorize it is because of the inherently unstable design of banks.
Fractional reserve banking is based upon taking in deposits (that can be redeemed in a minutes notice) and then lending the money long term (where it is illiquid and can not be redeemed quickly). As soon as the depositors lose confidence in the bank, they create a run on the bank. Since the banks keep very little cash on hand, and they can't liquidate the loans quickly.........they become insolvent and close their doors.
Listening to Bernanke testify at the Financial Crisis Commission, his biggest worry back in September 2008 was a national run on all banks by the depositors. This came very close to occurring when a money market mutual fund "broke the buck" on its money market accounts. If all investors had withdrawn their money from money market mutual fund accounts, the system would have shut down.
In summary, this book opens up your eyes to how common banking failures are with an average crisis period of once every 11 years. As an investor who purchased some bank stocks in 2006 and watched them start to decline in 2008, I would recommend never buying bank stocks.
With an average U.S. stock market Bear market occurring on average every 8 years and a banking crisis every 11 years, I would suggest a low-cost broadly diversified portfolio in global investments.
I guess the recent bank reform law included a provision for the biggest banks to provide a "living will" telling how they could be broken apart and easily sold when they fail. It will be interesting to see if this helps the "too big to fail problem" the next time the banks screw up.
For students of financial markets, this book belongs on your bookshelf.
on December 26, 2009
It is hard to over-praise "This Time is Different" by Carmen Reinhart and Kenneth Rogoff. Sweeping, factual and accessible, this book will complement, if not replace, Kindleberger's "Manias, Panics, and Crashes" as the first stop to understanding financial crises. You have to like reading tables and charts to appreciate this book, although its ability to say so much with simple descriptive statistics is enormously appealing.
"This Time is Different" explores many themes: the pervasiveness of financial crises, including among countries which we do not normally associate with crisis. Development and crisis have never been as closely linked as in this reading. Banking crises are omnipresent in advanced and emerging economies alike and have been so for years. There are striking similarities in the build-up to a crisis, whether in emerging or advanced economies: increased public and private debt and asset bubbles in equity or real estate. And the clean-up costs are universally high, not only in direct costs but also in increased assumed liabilities by the state.
The book will have an ever greater impact in at least three ways. First, it is pregnant with ideas. One can see dozens of doctoral theses emerging to complete or revise the data in the book, to test and re-test its hypotheses, and to provide answers to the many puzzles raised therein. From personal finance to sovereign risk rating, from economics to political economy and international relations, this book is full of threads to pull and nuggets to mull over.
Second, the book's direct and continuous assault on the paucity of data on several vital economic indicators is refreshing to those who have spent any time tracking data that is impossible to find. If any effort to get better data springs from this book, driven by governments or intentional organizations, the debts we will owe the authors will be enormous.
Finally, there is the "This Time is Different" lens. At first, I thought it a clever attempt to give the book an angle, which it does. But as you read the book, you sense something more: it is an argument that when things look like they are out of control, they usually are - even when there is no one on earth who can say when the bust will come or what will trigger it. If during the next run-up to a crisis, there are policymakers who say we need to act even though things looks good, this book of 460-odd pages may save us all billions if not trillions of dollars. And how can you beat that?
on July 2, 2015
Carmen Rogoff is a leading expert on Third World financial crises. Ken Reinhart, former chief economist for the International Monetary Fund, is a top international macroeconomist. Their reputation was tarnished in 2010 when their paper “Growth in a Time of Debt” was found to be not replicable without following their 1. coding error (excluding Australia, Canada and others from the data) 2. unconventional weighting of countries 3. selective/ excluding use of data. (unfortunately GIGO) Questioning their methodology then became generalized (their use of growth regression methodology) which grand scheme “solved” what to this reader looks like a chicken-egg analysis problem.
This book was written before their deification by pro-austerity, less-compassionate politicians. This book lays out the data and the small empirically based “aha's”, which investors can use to practical results. And their successful effort in this book is enormous, teasing out reliable historical data, never found before, especially from the Third World. Never underestimate the power of details. I admire this book completely for its precision. And the conclusion I can draw: Caveat Emptor. The future rhymes with the past. Do not confuse causation and correlation.
on March 2, 2010
Carmen Reinhart and Kenneth Rogoff render a great service to their readers by clearly demonstrating how the excessive debts that governments, banks, corporations, or consumers accumulate during a boom often end badly because of the precariousness and fickleness of confidence (p. ixl). The "this-time-is-different syndrome" is based on the fragility of highly leveraged economies, in particular their vulnerability to crises of confidence (pp. xxxiv; 15-20; 287; 290-292).
To their credit, Ms. Reinhart and Mr. Rogoff convincingly make their case by making extensive use of a comprehensive database that is worldwide in scope and covers the last eight centuries of financial crises (p. xxvii). Both authors focus most of their attention on the two types of crises that are the most relevant today, i.e., sovereign debt crises (e.g., Greece) and banking crises (e.g., United States) (p. xxvi). Countries and banks can be vulnerable to a loss of creditor confidence, especially when they depend on short-term finance through loans or deposits (pp. 28; 105-106). In contrast, Ms. Reinhart and Mr. Rogoff do not spend much time on defaults on household debt and corporate defaults beyond sovereign events (p. 251).
The book under review offers key takeaways for readers:
1. Inflation, exchange rates, and domestic and sovereign default crises often hit concomitantly with banking crises, especially in the most severe ones (pp. 73-77; 145; 173). External default crises or high inflation crises are often correlated with large domestic debts (pp. 125; 128). Inflation crises most often occur in coincidence with exchange rate crises, especially in countries subject to chronic inflation (p. 189).
2. A country's own history of default and high inflation are the key factors that determine external debt intolerance (pp. 25; 32). The willingness to pay rather ability to pay is typically the main determinant of a country's decision to default on sovereign lending (p. 54). In contrast, outright defaults on domestic public debt are extremely rare, even if governments may inflate debt away (p. 110). Once a country slips into being a serial defaulter, it retains a high and persistent level of debt intolerance (pp. 29-30; 94). The same factors are also likely to weigh heavily on domestic debt intolerance (pp. 33; 67; 169). Without the pull of an outside political anchor (e.g., the European Union for the PIIGS), recovery may take decades or even centuries (pp. 30; 150).
3. Today's advanced economies once experienced the same kind of default, inflation, and debasement episodes that plague many emerging economies today (pp. 44; 179; 283-287). A government's ability to establish political institutions that sustain large amounts of debt repayment constitutes an enormous strategic advantage by allowing a country to marshal vast resources, especially in wartime (pp. 55; 58; 65). In contrast, no major country has been able to graduate from banking and currency crises (pp. 147; 151-153; 272; 284).
4. Many governments and multilateral institutions show a remarkable lack of transparency in failing to make time series on domestic debt easily available. Surprisingly, global investors do not ask for a raise in risk premiums on new debt issuances in the absence of easily available time series on domestic debt (pp. 137-138).
5. Markedly rising asset prices, slowing real economic activity, large current account deficits, sustained debt build-up (whether public, private, or both), and capital flow bonanzas have been particularly strong indicators for financial crises, at least in the post-1970 period of greater financial liberalization (pp. 214-217). The U.S. showed virtually all signs of a country on the verge of a (severe) financial crisis in the run-up to the 2007 subprime financial crisis (p. 223). U.S. policy makers should have decided several years prior to the current crisis to deliberately take some steam out of the system (pp. 199-200; 221).
6. Inadequate regulation and lack of supervision at the time of liberalization may play a key role in explaining why deregulation and banking crises are so closely related (pp. 155-156; 217).
7. On average, during the modern era, real government debt increases by 86 percentage points during the three years following a banking crisis in both emerging and advanced economies (pp. 142; 170; 238). This empirical evidence results mainly from the significant adverse impact that most banking crises have on government revenues and the existence of substantial fiscal stimulus packages in some episodes (pp. 164; 220; 231).
8. To place the U.S. housing bubble in perspective, the cumulative real price increase was about 92 percent between 1996 and 2006, more than three times the 27 percent cumulative increase from 1890 to 1996 (p. 207). Real estate collapses are protracted affairs. Declines in real housing prices average 35 percent stretched out over six years (pp. 224; 226). Today, U.S. home prices are already a third below their 2006 peak. V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment (p. 239).
9. Pre-election posturing and post-election uncertainty are often key drivers of sovereign defaults and financial crises. Unsurprisingly, the U.S. subprime crisis became much worse in the run-up to the country's 2008 presidential election (p. 53).
10. The global nature of the current crisis has made it more difficult, and contentious, for individual countries to grow their way out through higher exports or to smooth the consumption effects through foreign borrowing (pp. 233; 239; 269)
In conclusion, Ms. Reinhart and Mr. Rogoff make a compelling case that many policy makers around the world should learn more from history to try to soften the blow of impending financial crises instead of pleading too often their ignorance and/or powerlessness when these crises hit them (pp. 277-282; 287-290). The pervasive view that "this time is different" is precisely why this time usually is not different and why financial crises eventually strike again (pp. 80; 98; 270).