The business cycle and its financial analog create a similar cycle in the psychology of investors, citizens, and governments. During and immediately after many financial crises, investors’ fear and governments’ paranoia undermine the functioning of the financial markets and the economy at large. The memory soon starts to fade, and during the most sustainable and real economic times, both groups are optimistic about the potential of the markets but wary of their excesses. As growth and profits increase, though, investors and citizens forget the lessons of the last crisis, and banks and investors take on greater debts, dramatically increasing profits but also increasing risk and forming bubbles. A new book, This Time is Different, draws its name from the recurring rationalization for this behavior.
The authors, Carmen M. Reinhart and Kenneth S. Rogoff, are professors of economics at the University of Maryland and public policy at Harvard University, respectively. Unlike so much academic work, This Time is Different does not suffer from confusing and abstruse writing.The book is structured as a tour and history of varieties of financial crises. After a useful introduction to the relevant terms and concepts, the authors take on one kind of crisis at a time, developing its history and general causes, if any exist.
Each chapter usually proceeds through an introduction, a vast amount of data, further discussion, and a conclusion—a format resembling journal articles more than editorials. Its purpose is to clearly present many evident facts rather than persuade. This makes it a slow and at times laborious read, especially since the significance of the facts Reinhart and Rogoff present are not always clear to non-experts.
On the other hand, the facts and data in the book are far more reliable and comprehensive than any that have ever been presented on the subject of financial crises. For this reason, the prominent historian Niall Ferguson called This Time is Different “quite simply the best empirical investigation of financial crises ever published.” Reinhart and Rogoff have compiled and analyzed remarkable data sets, spanning an incredible amount of history.
For example, in a chapter describing governmental policies that cause inflation in an attempt to reduce the significance of their domestic debt, they present data that extends back to the 1500s for most of Europe, and even further in some places. I was so frequently surprised that their data even existed that it is hard to imagine that they missed anything significant.
One chapter addresses domestic public debt, an idea that Reinhart and Rogoff discuss in unusual and exceptional detail. Their ideas here are particularly interesting because many economists have described domestic debt—such as bonds bought by citizens—as financially meaningless, since to borrow from oneself seems insignificant. The authors argue that internal debt is actually so important that it has caused many financial crises; only those blind to history would assert otherwise.
Another of the authors’ valuable observations is that, while some nations have graduated from external debt crises, banking crises happen in every single country and are often more serious where financial markets are more developed and complex. What this means is that, if the best financial system would prevent runs on banks, market crashes, and the like, no country has gotten it right yet. Furthermore, innovation and complexity in financial markets is probably only valuable up to a certain point, a point which many Western countries, including the United States, surpassed years ago.
The greatest problem with This Time is Different is that it does not seem to have any thesis or gestalt. The idea that recurring financial exceptionalism is always wrong and plays a critical role in enabling financial crises is never explicitly tackled head-on except in short quips scattered throughout the book. Still, due to the quality and comprehensiveness of its data, This Time is Different is destined to become a classic in economics and finance, if only among experts.