This Time Is Different

Carmen M. Reinhart & Kenneth S. Rogoff, “This Time is Different” (Eight Centuries of Financial Folly), Princeton Univ. Press, 2009, 463 Pages
A book for academics—of the 463 pages, 292 contain texts woven through with tables and graphs. The remaining pages are appendices, etc. This is a book for financial scholars and a few OCD people who tend to finish any book they start. I was intrigued by the title. However, for most I would recommend skipping straight to page 192 and read on from that point which deals with our current crisis.

This book offers analysis of the history of financial crises dating from England’s fourteenth-century default to the current United States sub-prime financial crisis, now being called the Second Great Contraction. The books data covers sixty-six countries in Africa, Asia, Europe, Latin America, North America, and Oceania. The range of variables encompasses, external and internal debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices.

My Notes:
Pg. xxxii: On average, government debt rises by 86 percent during the three years following a banking crisis. These indirect fiscal consequences are thus an order of magnitude larger than the usual costs of bank bailouts. Much of this is due to the decrease in tax revenues that follow banking crisis.

Pg. 35: Following the rise of fiat (paper) currency, inflation became the modern-day version of currency ‘debasement,’ the systematic degradation of metallic coins that was a favored method of monarchs for seizing resources before the development of the printing press.

Pg. 180: No emerging market country in history, including the U.S. (whose inflation rate in 1779 approached 200 percent) has managed to escape bouts of high inflation.

Pg. 207: The U.S. financial crisis of the late 2000s was firmly rooted in the bubble in the real estate market fueled by sustained massive increases in the housing prices, a massive influx of cheap foreign capital resulting from record trade balance and current account deficits, and an increasingly permissive regulatory policy that helped people the dynamic between these factors. Since 1891, where the housing data begins, no housing price boom has been comparable in terms of sheer magnitude and duration to that recorded in the years culminating in the 2007 subprime mortgage fiasco. Between 1996 and 2006 (the year when prices peaked), the cumulative real price increase was about 92 percent—more than three times the 27 percent cumulative increase from 1890 to 1996!

Pg. 223: Chapter 13 shows that standard indicators for the U.S. such as asset price inflation, rising leverage, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis—indeed, a severe one.

Pg. 224: More often than not, the aftermath of a severe financial crises share three characteristics:
1. First, asset market collapses are deep and prolonged. Declines in real housing prices average 35 percent stretched out over six years, whereas equity price collapses average 56 percent over a downturn of about three and a half years.
2. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points during the down phase of the cycle, which lasts on average more than four years.
3. Third, government debt tends to explode; it rose an average of 86 percent (in real terms, relative to precrisis debt) in the major post-WWII episodes. The main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. The biggest drive of debt increases is the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions.

Pg. 248: This ‘Second Great Contraction’ which began in 2007, even if it does not evolve into the Second Great Depression, still surpasses other turbulent episodes, including the breakdown of Bretton Woods, the first oil shock, the debt crisis of the 1980s in the developing world, and the now famous Asian crisis of 1997-1998.