Reading This Time is Different is like navigating the underwater snorkeling trail at Truck Bay in St. John, the Virgin Islands. There is a lot that requires attention. The signposts at the bottom of the water, however, are replaced with data within the book and in particular in the appendix. There are a lot of them. Nevertheless, that is the point of the book. It is data driven. The authors make this clear early on in the preface. Here they note that Kindleberger’s 1989 Mania, Panics and Crashes is probably the most famous of past books of the type they have written. They describe it and other earlier similar texts as primarily narrative and supported by thin data. Their book, on the other hand, is the opposite: analytic and based on lots of information.
The Signposts in the book
The authors tread through the first twelve chapters laying the way for the finale, our present crisis. Their groundwork includes definitions and concepts in part one; consideration of government debt in part two and a cataloging of overt defaults in three. Part four takes on crises interrelated to banking, currency and inflation. The culmination in part five is a reflection on the current crisis.
The authors suggest in the preface that for those most interested in the 2007-2008 fiasco, fast forward to part five (chapters 13-16) immediately. It is here that Reinhart and Rogoff talk about what should have alerted people to this crisis. They say it was the large run up in housing prices supported by leverage. Evidently in 2008, the overall sum of mortgages in the United States was 90% of gross domestic product.
Whatever the cause, the result of the crises is now more important. The authors state that in severe financial crises after war, unemployment increases and housing prices decline for five or six years. The question is whether this will happen now when more flexible monetary policies are in place and our global exchange rate is also more plastic. Reinhart and Rogoff seem to suggest that it could. They note that V-shaped recoveries in the stock market are more common than the same contour revitalization in real housing pricing or employment. Also, their data shows that “defaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises”.
An Important Signpost
One of the most important concepts in the book from my point of view was the chart of the sequencing of a crises, a prototype on page 271. It encompassed work from several authors including the present ones to compose a flow chart to show how a financial crisis could evolve. Bank liberalization leads to initiation of a currency crash followed by inflation. Then, if there wis no default, the peak of the banking crises follows. However, if there is a default on external and/or domestic debt, the inflation crises worsens and only then does the peak of the banking crises take place.
The Last Signpost
The authors naturally want to prevent another crisis going forward. They don’t want people saying again, “This time is different.” One constructive comment they make is that keeping track of housing prices and debt calculated against historical benchmarks is a start because evidently this has not been done in the past. On pages 289-290, they give more specific guidelines, almost too detailed to be reiterated here. In sum and summary, that is the book, comprehensive and almost tiresome. It is meant for a serious reader, perhaps Allan Greenspan, but then I’m thinking he must know this stuff already, or does he?