Reinhart and Rogoff's book provides a quantitative history of financial crises derived from over 600 years and 66 nations. The basic message from all their data is that there are remarkable similarities in today's financial crises with experience from other countries and nations. The common theme is that excessive debt accumulation by government, banks, corporations, or consumers often brings great risk. It makes government look like it is providing greater growth than it is, inflates housing and stock prices beyond sustainable levels, and makes banks seem more stable and profitable than they really are. Large-scale debt buildups make an economy vulnerable to crises of confidence - especially when the debt is short-term and needs to be refinanced (the usual case).
Reinhart and Rogoff go on to conclude that most of these booms end badly. Outcomes include sovereign defaults (government fails to meet payments on its debt), banking crises (heavy investment losses, banking panics), exchange rate crises (Asia, Europe, Latin America in the 1990s), high inflation (a de facto default), and combinations of the preceding (1930s, today).
What did the authors learn from their data digging? Severe financial crises share three characteristics: 1)Declines in real housing prices average 35%, stretched out over six years, while equity prices fall an average 56% over 3.5 years. 2)The unemployment rate rises an average of 7 percentage points during the down phase (average length = four years). Output falls more than 9% over a two-year period. 3)Government debt tends to explode, an average 86% in real terms. The biggest driver of this debt explosion is the collapse in tax revenues; counter-cyclical fiscal policy efforts also contribute, as well as spiking interest rates.
Reinhart and Rogoff also identify what they find to be the best and worst (pronouncements from the Federal Reserve, U.S. Treasury heads, and more than a few 'successful' academics and stock-pickers) early warning indicators of crises. Finally, the authors warn that premature self-congratulations on early successes in correcting a banking crisis may lead to complacency and an even worse state of affairs.
The 'good news' is that Reinhart and Rogoff have provided a detailed and credible accounting of past experiences. The 'bad news' is that despite the authors' scholarly and intense efforts, "This Time is Different" is not likely to sway many minds for two reasons. 1)The book is too much of a scholarly tome to become widely read, and there are too many self-serving 'think-tanks' offering contrarian opinions. Others, more data-driven, will point out that most of "This Time Is Different" is drawn from earlier days and non-U.S. nations, and thus of limited applicability to the U.S. today. 2)Despite recent disproof of claims that government has mastered the economic cycle via Federal Reserve fine-tuning and counter-cyclical government spending, and that 'the old rules of valuation no longer apply,' we're back blowing bubbles. Today's MSNBC headline reads 'New Market Bubble May be Brewing,' the 'Greenspan Put' (government will bail out falling markets, while allowing soaring ones) continues, no action has been taken to rein in Wall Street gambling and unwarranted bonuses, financial institutions believed 'too big to fail' are bigger than ever, and 2010 election pressures will undoubtedly auger for continued easy money, inflating ourselves out of debt, and increased debt at all levels.
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 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 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.
Don't be fooled by the (suberb) Mad Men-style cover art -- this is essentially an academic text, descriptions of Reinhart and Rogoff's compilation of data on domestic and external debt defaults for dozens of countries over hundreds of years. The papers they have circulated and/or published based on this data have received extensive attention in the last year, and this book contains little that will be new to those who have read them. I think that Reinhart and Rogoff were, originally at least, most impressed with the data on domestic defaults but in the aftermath of the 2008/2009 "great contraction," the work on banking crises will probably be of interest to many readers as well.
The book is repetitive, which reflects its origin as a series of independent papers, but which can be viewed as an advantage in that it makes it easier to read (or assign to students) a single chapter, without reading all that has preceded it in the book. The book's great weakness is the terrible design of its numerous time series graphs. Many of these show multiple data series on a single set of axes, with no clear indication of which line represents which data series. I suspect that in whatever software Reinhart and Rogoff used in their original analysis, these lines had different colors, or perhaps one was dashed, but in the rush to publish these details were lost. They can be decoded through a close reading of the accompanying text but, if you can understand a graph only through a close reading of the text describing it, why have a graph at all? Perhaps this will be addressed in later editions.
The book is copiously footnoted, as you would expect for a work of this sort. It's not fun reading but it is authoritative and important. If you're not sure whether or not it will be of interest, google for a copy of one of Reinhart and Rogoff's recent papers on the same topic; several are available freely online. If the paper is interesting to you, the book probably will be too.
on November 15, 2009
I have little to add to previous reviews of book contents. However, my take away was different than that of prior reviewers. The book provided less than I expected. I had hoped for an attempt to relate the various crises in a holistic manner by considering interplay between banking, currency, internal and external political pressures including war, markets and flaws and excesses therein, debt, inflation, greed of the ruling class, competition between societal classes, etc. I expected to receive the benefit of the authors' experience, wisdom and insight. I imagine such an effort would have required focus on one or perhaps a few comparators for the present situation. That was not the purpose. Instead the book is a vehicle for showcasing an extensive new economic data set developed by the authors of 800 years of economic crises. One receives a birds-eye statistical analysis of that data.
That is not to say that the work was poorly written or uninformative. A number of insights were provided and supported through cogent argument and readable graphics. The text was quite readable though redundant in places. Good effort was made to provide two reading tracks - one for those who wanted to know details behind the analysis and one for those focused on findings and conclusions. Important, recurring themes were demonstrable through the data, and considerable useful and interesting information was certainly provided.
Nevertheless, only a few general and cursory allusions were provided to the "why and wherefore" factors noted above; i.e., context was studiously avoided. Absent consideration of the larger picture including motivations of significant players, the authors' concluding recommendations for avoiding future crises were produced with blinders and appear real-world unrealistic at best.
This is a readable economics text which provides historical economic data that are likely to be relevant to the course of the present crisis. Its weakness is that beyond statistical delineation of selected historical economic markers of risk (which were mostly intuitive in any case) it does not provide insight into the nature of past, present or future difficulty. Perhaps my expectations were misguided but I was not prepared for the measured, academic tone of the book with steadfast refusal to venture beyond the central data set. As such I was disappointed and found the effort sterile and overly long.
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.
"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 February 24, 2013
This book was not what I expected it to be. It read like an academic paper, although it was well written and very accessible. Rather than being filled with profound insights and deep analyses of big financial problem, it regurgitated well know economic facts but backed them up with loads of empirical data. Now, I don't know about you, but I am not interested in looking at 200+ pages of tables that detail every single piece of data on every single financial crisis ever recorded. While this data is necessary to develop economic models and theories, it does not make for an interesting book for a general audience. The insights (some of which were truly interesting) of this book could have been summarized in about 20 pages (indeed, there are only about 150 pages of actual text in the book, so despite it looking massive, I breezed through it).
While the book discussed the common causes of financial crises, it did not examine specific crises in detail, save for the U.S. subprime crisis. There are some financial crises that are considered watershed moments in history, and I was hoping those could be explored in depth. Instead, we get absurdly tiny summaries for each crisis, such as "X country defaulted on XX% of its external debt in 19XX" without any additional context or analysis. As there have been hundreds of such crises, we get hundreds of single sentence summaries of virtually every crisis in history that mean absolutely nothing to the reader.
I did not appreciate this macro-macro analysis. None of this would have been a problem if I didn't feel like the book was marketed as being a magnum opus tour through the history of financial crises, because then I wouldn't have bought it. It is a boring, academic read that repeats itself, is unnecessarily protracted, and has few original insights considering its gargantuan size.
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.