This Time is Different: Eight Centuries of Financial Folly, Carmen M. Reinhart & Kenneth S. Rogoff, Princeton University Press (2009).


Under ordinary circumstances, “This Time Is Different” would be of interest primarily to professional economists and students – but given the timing of its publication, smack dab in the middle of a financial crisis, the book has caught on with a wider audience.


Go to a forum about the recent (or current?) financial crisis, and someone will probably brandish a copy in the air as though to say, “I read it.”  And at a May 26, 2010 meeting of the Fiscal Commission, which has been charged with proposing fixes to the nation’s fiscal woes after the November elections, testimony of Professor Reinhart plus her responses to questions took up a goodly share of the 2-1/2 hour televised session.  Ergo, people who are more interested in policy issues than in quantitative economic data may want to read the book just to be “in the know.” 


In my case, the clincher was a personal recommendation from a friend who used to play chess with Professor Rogoff (but never managed to beat him).


The basic thrust is to summarize and draw conclusions about financial crises from reams of historical data – a very different tack from Niall Ferguson’s qualitative survey in “The Ascent of Money: A Financial History of the World,” Penguin Press (2008).  (Ferguson praises “This Time Is Different” in a jacket blurb, by the way, as making “a truly heroic contribution to financial history.”) Be prepared for dozens of tables (data), figures (graphs), and boxes (sidebars), plus discussion thereof in the text – delivered without a lot of ideological baggage (which right away distinguishes this book from most of what has been written about the financial crisis).  Such an approach lends credibility to the central theme, which must be articulated 100 times, that private and public policy makers are prone to forget the lessons of the past and take risks that will eventually backfire based on the assumption that they are smarter or luckier than their predecessors.


For readers who would dispense with the historical background and get right to the present day situation, the authors suggest the option of starting with Part V, “The U.S. Subprime Meltdown and the Second Great Contraction.”  I elected not to do this, reading the book from start to finish, but did skip over some of the tables and figures. 


Here are some takeaways from the book, which are amply supported by the data presented:


1.      The basic cause of financial crises is debt, taken on in good times, which cannot be supported when reverses occur and/or lenders lose confidence.  Sometimes the debt is issued by banks and other private firms (banking crisis), sometimes the debt is issued by governments (sovereign debt crisis), and not infrequently the second type of crisis follows the first.


2.      Banking crises have been experienced over the years by developing and developed countries alike, but until recently it was thought that developed countries had graduated from sovereign debt crises.  It now appears that this conclusion may be wrong.


3.      The so-called “Second Great Contraction” is the first global financial crisis of the post-World War II era.  It is necessary to go back to the Great Depression in the 1930s to find an economic crisis of comparable size and scope.  Nevertheless, striking parallels exist between the current situation and lesser country or regional financial crises of the past 60+ years. Notably, the postwar data show that a banking crisis typically results in a big run-up (86% on average) in government debt over the next three years.  (See Figure 10.10, page 170.) No wonder that a sovereign debt crisis often follows a banking crisis, and may yet do so in the current situation.


4.      Another important insight is a greater role for domestically held debt in government debt crises than had generally been assumed.  Other analysts may have gone astray, apparently, because domestic debt data are harder to come by for many countries than external debt data.  Factoring in domestic debt helps to explain why so many countries have experienced debt crises at what appeared to be manageable debt levels.  Typically, governments are more reluctant to renege on domestic than external debt, for which reason debt crises involving domestic debt tend to be more pronounced and of longer duration.


However, the data do not resolve the policy questions – they simply establish that the answers are important.


A.     As for whether the U.S. government should pull in its fiscal horns or continue trying to stimulate the economy in hopes of promoting a hopefully rapid recovery, the authors say (page 290) “the surge in government debt following a crisis is an important factor to weigh when considering how far governments should be willing to go to offset the adverse consequences of the crisis on economic activity.”  Well, that certainly settles the question! 


B.     Can future financial crises be avoided, and if so how?  The suggested answers boil down to demanding better data (Moody’s ratings, etc., are ranked at the bottom of the spectrum), empowering some sort of international financial institution to ride herd on profligate national governments, and a lot more humility.  Chapter 17.     


Bill Whipple

June 15, 2010