This Time is Different: Eight Centuries of Financial Folly

Jacket endorsement and summary:

"This is quite simply the best empirical investigation of financial crises ever published. Covering hundreds of years and bringing together a dizzying array of data, Reinhart and Rogoff have made a truly heroic contribution to financial history. This single marvelous volume is worth a thousand mathematical models."

— Niall Ferguson, author of The Ascent of Money

This was the fourth book that I've read about the ongoing financial crisis, and perhaps the most illuminating.  However, it contains far more about earlier crises. This is a scholarly work that will have great appeal to students of finance and economics.

Global Database on Financial Crises

The core of the book's underlying research is an extensive economic database. In some instances the data go back eight centuries. In just the recent 1800-2009 period there have been "at least 250 sovereign external default episodes and at least 68 cases of default on domestic public debt." Information about government debt is elusive, and in many cases the authors had to rely on consulting scholars. Data on medieval Europe and China go back as far as the twelfth century.

The theme in common to almost all financial crises is excessive debt accumulation, by government, banks, corporations and/or citizens. During boom times, the risk was not appreciated. Episodes of high inflation are another recurring theme.

Type crises unveiled include:

Crises Defined by Quantitative Thresholds

• Inflation crises
• Currency crashes
• Currency debasement
• Bursting of asset price bubbles

Crises Defined by Events

• Banking Crises
• External Debt Crises
• Domestic Debt Crises

Some frequent characteristics of an approaching financial crisis:

• Governments going to great lengths to hide their true financial condition.
• Asset bubbles (made much more dangerous when fueled by debt) (a fall in housing prices often precedes a crisis)
• Widespread perception that "this time is different." "It almost never is." One of the most engaging features of the financial crisis descriptions is the summary "what were they thinking at the time?"

This Time Is Different Syndrome

The author's summarize this delusion: "It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply." The current boom "is build on sound fundamentals, structural reforms, technological innovation, and good policy."

Second Great Contraction in the late 2000's

The author's are calling the current financial crisis the "Second Great Contraction."  The first was the Great Depression.

The US was the epicenter, and the contagion quickly spread worldwide. This began with the subprime mortgage meltdown in 2007, and (in mid-2010) we haven't seen the end of the crisis.

"All the red lights were blinking in the run-up to the crisis."

• Four-year run-up in housing prices, gaining over 50% 2002-2006.
• High levels of corporate and consumer debt
• Financial liberalization: lax regulation, imprudent lending
• Lack of transparency (especially poorly-understood derivatives)