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Book Review: This Time Is Different

If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are.

~ Carmen Reinhart & Ken Rogoff, This Time Is Different

The subtitle of This Time Is Different indicates that the book covers "Eight Centuries of Financial Folly", but its release date (September, 2009) makes it extremely relevant to our most recent and ongoing bout of financial folly. In fact, the authors devote the final four chapters of the book to what they call "The Second Great Contraction" (the first being The Great Depression) triggered by the U.S. subprime mortgage crisis. The authors do a great job of outlining the "huge regulatory mistakes" that lead to the current financial crisis, from the deregulation of the subprime mortgage market to the 2004 SEC decision to allow investment banks to triple their leverage ratios.

They describe 4 main types of financial crises (sovereign debt, currency, banking, and inflation) but concentrate quite a bit on the sovereign debt and banking varieties. They do note, however, that these crises tend to occur in clusters and one type can easily trigger another. In the run-up to the subprime crisis, they note that the U.S. exhibited "all the signs of a country on the edge of a financial crisis - indeed, a severe one." Those signs were: "asset price inflation, rising leverage, large sustained current account deficits, and a slowing trajectory of economic growth".

The This-Time-Is-Different Syndrome

Of course, the main tenet of the book is that the aforementioned financial follies are exacerbated by the "this-time-is-different syndrome". It refers to ideas we often hear from financial professionals and government officials during boom times and is characterized by the following lines of thinking, which are eventually proven false:

  • Old valuation rules no longer apply.
  • We are smarter now. We're doing things differently, and we have better systems in place.
  • We have learned from past mistakes.
  • The new boom is built on sound fundamentals, structural reforms, technological innovation, and good policy.

Does any of that ring a bell? It should. We heard all of the above right up to the point when the U.S. housing and mortgage markets imploded in 2007-2008. Too much debt eventually leads to problems and this incident was no different. The aftermath will likely follow the historical form Reinhart and Rogoff have noted as well:

  • Asset market collapses are deep and prolonged.
  • Profound declines in output and employment ensue.
  • The amount of government debt explodes.
This Time Is Not Different . . . But It Sort of Is

There is a bit of an inherent contradiction in the this-time-is-different thesis. I once heard Ken Rogoff discuss it in an interview and it goes something like this: This time is not different in the sense that history shows that financial crises happen quite often. But there is also a tendency for financial and government leaders to fail to recognize that the economic trajectory after a crisis-induced recession is very different from the one we might see following a normal business cycle-induced recession. Therefore, "standard macroeconomic models calibrated to statistically "normal" growth periods may be of little use."

In that sense, this time is different. It differs from normal cyclical economic activity, but not from what usually happens following a financial crisis. If you think of it that way, it seems like we shoot ourselves in the foot twice when afflicted by the this-time-is-different syndrome: once, when we fail to see the crisis coming, and again when we try to get ourselves out of it using solutions that apply to a different set of problems.

In the wake of the recent financial crisis, we have repeatedly witnessed governments and central banks attempting to treat the symptoms without really attacking the source of the disease: debt. Instead, they have tried to cure a debt hangover with another round of debt. Hair of the dog anyone?

"This Time" Is Worth Your Time

When I received my copy of the book, my first impression was "Gee, this is a lot longer than it looked online." It's a little over 460 pages, but the main text of the book ends around page 290. The remainder is a treasure trove of historical economic data aggregated for your convenience. There's also an extensive notes section, plenty of references and two different index choices - one for names and one by subject.

Before the core of the book even gets started, there is both a Preface and a Preamble, both of which are worth your time. They set the tone for the information in the book and offer some succinct overall impressions. The first twelve chapters deal with the description and causes of various types of financial crises throughout history, including The Big One (the Great Depression). The remainder deal with the current crisis and how the information in the preceding chapters might apply today.

The first sentence of the Preface announces that "this book provides a quantitative history of financial crises in their various guises". If you are not an economist or a big fan of mathematical or statistical analysis, you may find that the quantitative part of this text goes over your head a bit. In between the charts, tables and statistics, however, you will also find that some very compelling ideas emerge. The plethora of valuable information means this book deserves a spot in your personal library, both as a reliable reference and a reminder that human folly can and does regularly wreak havoc on our finances.

If you've read the book, I'd love to hear your impressions. If not, does it seem like something that might interest you?

Disclosure: No Positions.