This Time is Different: Eight Centuries of Financial Folly [Tapa blanda]

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.

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.

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.