This Time Is Different: Eight Centuries of Financial Folly

This book is one of the most complete reviews of financial crises over the last 800 years that I have seen. After the Crash of 2008, some of the Lessons Learned from past crises would seem to apply today. For example, how do countries stay out of country related financial crises? The secret to keeping your country out of trouble is to first live below your means, meaning running a surplus each year. Second is to borrow as little as possible and to fund the debt with maturities over 10 years. Third is to have no hidden off-the-balance sheet guaranties. How to get your country into trouble is to run a deficit every year, borrow short term to fund the debt, and have a lot of hidden off-the-balance sheet guaranties. The authors divide past financial crises into many categories including inflation, currency crashes, debasement, serial default, this time is different, banking crises, and external/domestic defaults. Some of the summary statistics from past financial crises include: Average house price decline of 36% with 2008 sub-prime being 30% and 1929 of 12%. Average time for home prices to recover of 6 years. Average stock market decline of 56% with 3.4 years to recover. Unemployment usually rises by an average of 7%. In the U.S., before 2008 was 4% and it is now at 10%. The 1929 Great Depression increase was 20% over the base rate. Average GDP declines of 9.3% and peak to trough of 1.9 years. The authors point out that bubbles are much more dangerous when they are fueled by debt (2008 Sub-prime crises) than not funded by debt (2000 Tech Wreck). There has been 5 big bank crises since 1945 plus the 2008 Sub-Prime fiasco. This means a major banking crisis every 11 years (6 crises in 65 years). The once every 11 year banking crisis is the same order of magnitude as stock market crashes in the U.S. with 8 Bear markets since 1945 or once every 8 years (8 Bears in 65 years). The authors found that a banking crisis is the worst kind of crash. They found that real housing price bubbles were the best predictors of banking crises. Annual deficits and stock markets were not good predictors of banking crises because they give too many false alarms. One astounding finding to me was that government debt usually almost doubles (86% increase) after a banking crisis. It seems like the U.S. is on track to exceed the historical average in this category. Why have banks managed to create their own crisis about once every 11 years? The authors theorize it is because of the inherently unstable design of banks. Fractional reserve banking is based upon taking in deposits (that can be redeemed in a minutes notice) and then lending the money long term (where it is illiquid and can not be redeemed quickly). As soon as the depositors lose confidence in the bank, they create a run on the bank. Since the banks keep very little cash on hand, and they can't liquidate the loans quickly.........they become insolvent and close their doors. Listening to Bernanke testify at the Financial Crisis Commission, his biggest worry back in September 2008 was a national run on all banks by the depositors. This came very close to occurring when a money market mutual fund "broke the buck" on its money market accounts. If all investors had withdrawn their money from money market mutual fund accounts, the system would have shut down. In summary, this book opens up your eyes to how common banking failures are with an average crisis period of once every 11 years. As an investor who purchased some bank stocks in 2006 and watched them start to decline in 2008, I would recommend never buying bank stocks. With an average U.S. stock market Bear market occurring on average every 8 years and a banking crisis every 11 years, I would suggest a low-cost broadly diversified portfolio in global investments. I guess the recent bank reform law included a provision for the biggest banks to provide a "living will" telling how they could be broken apart and easily sold when they fail. It will be interesting to see if this helps the "too big to fail problem" the next time the banks screw up. For students of financial markets, this book belongs on your bookshelf.

"This Time is Different" is an excellent account of the tendency of people to believe that in times of asset booms, that this time is different and rising asset prices or large capital flows are justified by underlying economics. Books on crises tend to take different forms, either Kindleberg "manias panics and crashes" style case descriptions, minsky's goal of describing the mechanism for the cycles of risk, to something like Debt defaults and lessons drom a decade of crises where several cases are described in debth, all have their place and this book's approach is quite unique. The book has the intention of addressing the current global financial turmoil (that seems to be subsiding) and to show that it had similar symptoms to other situations and to further the imposing of a stricter methodology by central banks and governments to protect against this time is different syndrom. The authors have done their analysis off the availability of substantial historical data on a large number of countries for the last several hundred years and the cataloging of their defaults both domestic and foreign, the inflation history and the banking history. The book explores a lot of different phenomenon, from the commodity cycle on sovereign defaults, the real estate bubbles that precede banking crisis, the difference in mean duration of sovereign defaults to banking crisis, the steps in graduating from serial defaulters to stable countries more able to borrow in their own currency. They explore the sometimes glossed over phenomenon of local default and bond treatment during sovereign defaults (mainly manifested through inflation, though occasionally nonpayment). They look at the properties of the national debt as crises evolve and governments act countercyclicly. They look at the differences between global crisis and local crisis and the ability to devalue to tap into export led growth in the latter situation and the difficulty of policy in the former. The difficulty governments who borrow abroad substantially have post crisis in managing fallout without major inflationary repurcussions. The book is filled with a lot of situations that are implicitly explored rather than explicitly. The approach is a statistical one in the sense that they look at conditional expectations of crises- by that i mean, conditioning the data set on a particular type of crisis, they glean the mass of historical data to make conclusions. They dont look at any individual case in close detail (this includes the housing bubble that was created in the US) but try to explore the general properties of various crisis given their wealth of historical information. To me this is valuable as a foundation to do more case study work. One comes to the end of this more convinced that, asset booms and crisis have similar properties despite the feelings while they go on that there are strong underlying reasons for the price action. One also is able to get many interesting quantitative results on duration of crises based on their properties (sovereign or banking for example) one does not however come out of reading this book with the same sorts of situational knowledge you get from reading Kindleberg. I recommend reading this as a start but one could have made this book into volumes, most people probably are glad that they truncated it, but one ends this book feeling the need to read more and explore the situations that the statistics implicitly used. The ultimate goal one seems to get from the authors is to have a more algorithmic approach to crisis avoidance by active macropolicy making. The authors start to describe the approach but they leave the reader with the reality that it is a seriously open question and will require a lot of work by a lot of people to make the progress we hope for. One is left with the feeling that the search for policy wont be fruitless as crises have had similarities for centuries and its time for us to embrace that fact to forge the future.

If you are an investor, you need to read this book: "This Time is Different" The authors went through and captured data from around the world for the last 800 years to demonstrate that while financial crises are not identical, they do rhyme and have patterns that are recognizable. As someone with money on the sidelines because of all the shenanigans in the stock market (15 seconds front running, trade and cancel order in 65 microseconds), I am interested in how I should invest for my kids and retirement (if at all). The portions of the book that stood out are: (a) whenever banking crisis and housing bubble go hand in hand ("the twins") they tend to be very destructive as opposed to a pure stock bubble (e.g., internet bubble). See Table 10.8 at this [...] On average, these crises last 3-6 years except for Japan, which is still ongoing for 19 years. Equity price collapses on average 56% over a duration of 3.5 years. Unemployment is usually deep and prolonged, increasing by 7% over a four year period. Output drops on average 9% over an average of 2 years. (b) when the twins are synchronized, a sovereign debt crisis usually follows the twins. The typical sovereign debt crisis has the government exploding its debt by 86% either to bail out the bankers or to pump stimulus into the economy. You may remember that we had the banking and housing crash in 2008. In 2010, we are now seeing signs of a sovereign debt crisis so (a) and (b) are right on schedule ... for other countries at least. But (b) has not occurred in the US at least because (1) the dollar is the reserve currency (i.e., the Windows XP in a world without Apple Mac); (2) the dollar is backed by 6000 nuclear warheads; and (3) backed by 700+ military bases around the world. On the other hand, the US is borrowing as much money as all of the countries combined in 2010 alone. At some point, someone is going to yell "fire" and then we will have a full on sovereign crisis. For now, though, everyone is yelling fire in the Greek theater, Spanish theater, Irish theater, Portugal theater and so on so we're safe .... for now. The US' response to the crisis in 2008 was to do what Japan did and more. So don't expect this crisis to end in 3-7 years but may be much longer. This may be the first job-LOSS recovery because of the overcapacity of (1) labor in China and India; (2) manufacturing; and (3) housing. For an example, look to Japan where Japanese are outsourcing themselves into lower wage countries: [...] The authors end with the following empirical model for the crises in (a) and (b): Step 1 - financial liberalization. Any one with a breath can get a loan. NINJA loans (No-Income-No-Job-or-Asset) Step 2 - stock and real estate market crashes. Iceland in 2008. Step 3 - currency crash. This happened to Iceland in 2008. Step 4 - inflation picks up. Again Iceland in 2010. This has not happened yet in the US because the amount of debt $100Trillion is backed by only $1Trillion in physical dollar, hence deflation. Step 5 - peak of banking crisis - if there is no default of the banking system. The 6 US banks are too big to fail so this won't happen. Step 6 - default on external debt or domestic debt. Step 7 - inflation worsens, running 40%+ if step 6 occur. Personally, I believe that the financial, insurance, and real estate (the "FIRE sector") has metasized into a virulent form of cancer. This cancer, thanks to supercomputers and derivatives, will modify the above model as follows: Step 1 - financial liberalization. Step 2 - stock and real estate market crashes. STEP 3A - DEFLATION allowing bankers to buy up assets such as water purification plants, power plants, toll roads that our "betters" whom we have elected had loaded down with debts and derivatives. Step 4A - inflation picks up for these essential assets because only the banks have access to Uncle Ben Bernankio teller window. For the rest of us, deflation in jobs, housing, employment. Step 5A - the US becomes a corporate-kleptocracy like Italy or Spain. If you are not vigilant, your 201K will likely turn into a 101K so best to take the above model into consideration the next time you vote or invest. Best, KT "The issue which has swept down the centuries and which will have to be fought sooner or later is the People versus the Banks." Lord Acton - who, by the way, also wrote: "Power tends to corrupt, and absolute power corrupts absolutely"

I have little to add to previous reviews of book contents. However, my take away was different than that of prior reviewers. The book provided less than I expected. I had hoped for an attempt to relate the various crises in a holistic manner by considering interplay between banking, currency, internal and external political pressures including war, markets and flaws and excesses therein, debt, inflation, greed of the ruling class, competition between societal classes, etc. I expected to receive the benefit of the authors' experience, wisdom and insight. I imagine such an effort would have required focus on one or perhaps a few comparators for the present situation. That was not the purpose. Instead the book is a vehicle for showcasing an extensive new economic data set developed by the authors of 800 years of economic crises. One receives a birds-eye statistical analysis of that data. That is not to say that the work was poorly written or uninformative. A number of insights were provided and supported through cogent argument and readable graphics. The text was quite readable though redundant in places. Good effort was made to provide two reading tracks - one for those who wanted to know details behind the analysis and one for those focused on findings and conclusions. Important, recurring themes were demonstrable through the data, and considerable useful and interesting information was certainly provided. Nevertheless, only a few general and cursory allusions were provided to the "why and wherefore" factors noted above; i.e., context was studiously avoided. Absent consideration of the larger picture including motivations of significant players, the authors' concluding recommendations for avoiding future crises were produced with blinders and appear real-world unrealistic at best. This is a readable economics text which provides historical economic data that are likely to be relevant to the course of the present crisis. Its weakness is that beyond statistical delineation of selected historical economic markers of risk (which were mostly intuitive in any case) it does not provide insight into the nature of past, present or future difficulty. Perhaps my expectations were misguided but I was not prepared for the measured, academic tone of the book with steadfast refusal to venture beyond the central data set. As such I was disappointed and found the effort sterile and overly long.

It is hard to over-praise "This Time is Different" by Carmen Reinhart and Kenneth Rogoff. Sweeping, factual and accessible, this book will complement, if not replace, Kindleberger's "Manias, Panics, and Crashes" as the first stop to understanding financial crises. You have to like reading tables and charts to appreciate this book, although its ability to say so much with simple descriptive statistics is enormously appealing. "This Time is Different" explores many themes: the pervasiveness of financial crises, including among countries which we do not normally associate with crisis. Development and crisis have never been as closely linked as in this reading. Banking crises are omnipresent in advanced and emerging economies alike and have been so for years. There are striking similarities in the build-up to a crisis, whether in emerging or advanced economies: increased public and private debt and asset bubbles in equity or real estate. And the clean-up costs are universally high, not only in direct costs but also in increased assumed liabilities by the state. The book will have an ever greater impact in at least three ways. First, it is pregnant with ideas. One can see dozens of doctoral theses emerging to complete or revise the data in the book, to test and re-test its hypotheses, and to provide answers to the many puzzles raised therein. From personal finance to sovereign risk rating, from economics to political economy and international relations, this book is full of threads to pull and nuggets to mull over. Second, the book's direct and continuous assault on the paucity of data on several vital economic indicators is refreshing to those who have spent any time tracking data that is impossible to find. If any effort to get better data springs from this book, driven by governments or intentional organizations, the debts we will owe the authors will be enormous. Finally, there is the "This Time is Different" lens. At first, I thought it a clever attempt to give the book an angle, which it does. But as you read the book, you sense something more: it is an argument that when things look like they are out of control, they usually are - even when there is no one on earth who can say when the bust will come or what will trigger it. If during the next run-up to a crisis, there are policymakers who say we need to act even though things looks good, this book of 460-odd pages may save us all billions if not trillions of dollars. And how can you beat that?

I've just finished reading This Time Is Different. I should say I `finished' reading about two thirds of the book as I skimmed or skipped the most technical portions. The book, as per its subtitle: Eight Centuries of Financial Folly, bills itself as comprehensive look at sixty six countries and their financial crises over almost all of the last millennia. Either due to its marketing or my presumptions, I thought the book would be a narrative of pithy coverage of financial crises. Rather, the book is quite technical with numerous charts, graphs, and economic analysis; the first 50 pages are devoted solely to setting up the financial rubric the book will use to analyze its data points. As such, I don't recommend the book for anyone looking for a financial history, or something like The Big Short or The Lords of Finance (as I was). If you're looking for a technical, yet mostly approachable from a lay perspective, analysis of financial crises and how they relate to today, it's great. Despite my misgivings, I do think the most valuable portion of the book (for me) was the last section which accumulated the information from past experience and applied it to the Great Recession. The book came out in 2009, so it doesn't have a great deal of information about how the late-2000s crisis turned out. Yet, the book does have a good deal of information about other major banking crises and how they ended. Obviously, this type of information is quite timely. And on this account, the current situation doesn't seem so bad, and there are signs for optimism. Major banking crises, apparently, typically raise unemployment by 7% and unemployment grows for 4.8 years, on average. The US unemployment rate (U1) rose from around 4% to 10%, about average, but unemployment has grown for only around two years. Much of this is probably due to systemic causes, but it does undercut almost all of the standard Republican-party economic voodoo, and the deranged `expansionary austerity' that has hurt much of Europe. There's a lot of analysis like this, and with a lot of the recent good economic news, it's interesting to see how that stacks up compared with past crises. The book's most valuable message conveys is broader than just a technical comparison of the present with the past, but is apparent from the book's title: the past does repeat itself, and did so in 2007. The Great Recession was unique in certain ways, but followed a very particular pattern and carried numerous warning signs. Yet, as with many historical crises, the people in positions of power, contrary to a lot of the demonizing rhetoric heaped upon banks, regulators, politicians, etc., seem to have disregarded this history, took up the kool-aid, and really believed that this time was different. Yet, this time wasn't different, and it's folly to expect that in the future, that time will be anything but the same.

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.

On April 15, 2013, a year and a half after I had first published this review a study by Thomas Herndon, Michael Ash, and Robert Pollin from the U of Massachusetts came out and refutted the authors main thesis that once a country reaches a Debt/GDP ratio of 90% sees its economic growth contract nearly automatically. This had become a covenant of libertarians such as Paul Ryan and Europeans promoting fiscal austerity. It turns out that Reinhart and Rogoff studies were completely wrong. R&R made numerous mistakes pointed out by the U of Mass team. The main one was to exclude three years out of the New Zealand data during a high Debt/GDP period. During those three excluded years New Zealand had grown very rapidly which contradicted R&R thesis. Once you make those corrections (including a few others that were minute by comparison), there is no statistical difference in growth rate between countries with high Debt/GDP ratio vs ones with lower ones. So much for Austerity. This is a devastating blow to what we thought was a classic study on the subject. Below see my original review. Notice that I had also observed many other flaws with their work but not the one mentioned above since I never saw the data firsthand. This book is both fascinating and flawed. Starting with the flaws: First, the book is mistitled. It covers the last 200 years not the last 800. Second, their crisis framework is convoluted relative to the crystal clear framework of Charles Kindleberger in Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) . The latter leans on the seminal work of Irving Fisher The Debt-Deflation Theory of Great Depressions and Hyman Minsky (the credit cycle exacerbates the business cycle) that the authors completely ignore. Third, some of their analyses are obfuscating. They baffle the reader on how frequently emerging market countries default with surprisingly low external debt levels. Later, the authors clarify that debt levels are far higher when including domestic debt; then the baffling turns into the self-evident. Fourth, in Chapter 16, their development of a crisis index measure is weak with no predictive power. The first two graphs capturing this index (ranging from 1 to 5) over the past 100 years have the wrong y-axis (ranging from 0 to 180?) rendering the graph incomprehensible (pg. 253, 254). Two pages later, they use the correct scale (1 - 5). Fifth, the graph on page 267 denoting the % collapse of exports during the Great Depression has the wrong sign. Sixth, some of their conclusions are already outdated. They advance that Greece, Portugal, Italy, and Spain are all doing better than in recent years. The book came out in 2009; didn't those countries show signs of fiscal stress? Since 1800, Greece suffered external debt defaults or rescheduling in over 50% of the years. Seventh, their argument that large Current Account Deficits (CADs) fuel housing bubbles is not supported. When they show the magnitude of the rise in housing prices over 2002 - 2006 for many countries (Fig. 15.1), it is unclear if there are any relationship between high CAD and housing Bubbles. The housing bubble was far greater in many former USSR satellites than anywhere else (unclear if they had high CADs). Moving on to the ambivalent OK parts: 1) Their early warning indicators of banking and currency crises (Table 17.1) are interesting. They indicate that 12 month changes in real housing and stock prices are good early signals for banking crises. They mention other metrics such as CAD levels. But, those indicators are unsupported by any statistical analysis. Moving on to the good parts: 1) Their prototype sequencing of crises represents their best work. It shows how a nation can experience in succession financial deregulation, banking crisis, currency crash, inflation spike, and ultimately default. The tipping point is when a government faces an untenable choice between defending its currency (restrictive policies) and shoring up its financial sector (expansive policies). Governments invariably abandon supporting their currency. 2) Their historical data facilitate interesting observations: 2a) Crisis related to sovereign risks are so frequent, you wonder how countries ever manage to raise debt. While developed countries have "graduated" from defaults, they have not from banking crises. Since 1800, the UK, US, and France have experienced 12, 13, and 15 episodes of banking crises. Banking crises have been frequent since the 1980s. Developed countries are prone to banking crises because financial deregulation is a causal factor. In 18 of 26 banking crises observed since 1970, the financial sector had been liberalized within the preceding 5 years. 2b) Post WWII financial crises have been severe. On average, real housing prices decline by 35% over 6 years; stocks crash by 56% over 3.5 years; unemployment rate increases by 7 percentage points; GDP contracts by 9%; and, public debt rises by 86%. 2c) The US Subprime crisis was more severe than any other post WWII financial crisis. Its housing and stock market bubbles were more pronounced. The US CAD as a % of GDP was larger. The downturn in GDP was more severe. The resulting increase in public debt was faster. The ramp up of all mentioned indicators suggested a financial crisis was imminent. The authors remark that if the US had been an emerging market relying on external debt (in foreign currency), the US dollar value would have plummeted and interest rates soared. 3) When the authors move on to the US Subprime crisis, they note how the majority of experts, including Bernanke and Greenspan, were not concerned regarding the rising US Current Account Deficit (CAD) and rising housing prices. These experts stated the CAD and home price increases were associated with a World savings glut resulting from Asian export led economies. Meanwhile others (Rubini, Krugman, and the authors) were concerned about the CAD sustainability (absorbing 2/3d of World savings), housing prices (in real term rose by 92% between 1996 and 2006 or more than 3 x the 27% increase from 1890 to 1996! See graph pg. 207) and the massive increase in US household debt (rose from a norm of 80% of personal income to 130% by 2006). If you are interested in this subject, I also recommend Raghuram Rajan's Fault Lines: How Hidden Fractures Still Threaten the World Economy [New in Paper ].

Es un recorrido bastante academico por las diferentes crisis que han llevado a la sociedad predominantemente occidental a situaciones de crisis, depresion o recesión en repetidas ocasiones. Como los seres humanos tienen solo un poquito mas de memoria que un pez y repiten sus errores las crisis se suceden y los ilusos al salir piensan dos minutos antes de la siguiente crisis que ya no habra mas. Lo de dos veces en la misma piedra varía con este libro, son mas bien una veintena de veces las que repetimos. Y las que vendran. La escasez de memoria y las pasiones humanas como describe el libro, la codicia y el afan de enriquecerse nos llevan una y otra vez a recorrer los mismos caminos. El paisaje diferente hace pensar a muchos que el final sera distinto. Nunca lo es. Pero con lo facil que es, nadie le pone remedio. Aparte de eso, hay una parte del libro llena de tablas y comparativas que es super tocha. Pero esta bien que esté hay de consulta. El libro se ha puesto de moda y muchos hablan de el sin haber leido mas que la sinopsis. El trabajo de ambos escritores profesores de busqueda de datos y acumulacion de tablas es impresionante. Será, bueno ya lo es, uno de los clásicos de la crisis. Si politicos y economistas hubieran de aprenderse por ley un resumen de este libro antes de ejercer, igual a las generaciones venideras les lucía el pelo de otro modo. De un modo mejor.

A great reference for anyone interested in debt crises and banking crises that have occurred in world history. The “box” references add an enjoyable and rich dimension to the book. A lot of material for the novice. Highly recommended.

Awesome book

Well, reading this book has been a pretty great experience. The style is easy to follow, and the content is thorough. In a nutshell: if you want to understand the depth of the financial system and crises, along with a long series of data, this book is for you. So, enjoy!

Really azppreciate the book and research. For five stars, I would have preferred a more objective perspective and unifying theme. Plus would be interesting to see the post GFC update.