Some reviews: This Time Is Different

title of the book: This Time Is Different, by Reinhart and Rogoff

자료 1: Wall Street Journal

By Edward Chancellor, the author of "Devil Take the Hindmost: A History of Financial Speculation."

..... (전략) Messrs. Reinhart and Rogoff are content to furnish the historical data on the cycles of boom and bust. As economists, professors at the University of Maryland and Harvard respectively, they recognize the challenge to their discipline created by the recent financial collapse.

• But they offer frustratingly little economic theory to accompany their findings. There is nothing here on the role played by loose monetary policy in fueling speculative manias, although this subject has been addressed by earlier generations of economists, most notably the Austrian School, of which Ludwig von Mises and F.A. Hayek are the best known representatives.
• Nor is there any mention of the work of the late Hyman Minsky, whose "financial instability hypothesis"—suggesting that periods of stability encourage excessive risk-taking—explains why New Eras contain the seeds of their own destruction.
• The authors also ignore the role played by international exchange-rate regimes, from the gold-exchange standard of the 1920s to the U.S.-dollar standard today, in fostering global economic crises.

Despite these limitations, "This Time Is Different" is an important addition to the literature of financial history. It also issues a worrying economic forecast. Currently the markets are discounting a rapid and sustained recovery from the global economic meltdown. Around the world, governments are borrowing very large sums at very low rates—assuming that stimulus spending will generate future taxes to pay off the current debt binge. But Messrs. Reinhart and Rogoff's work points in a rather different direction: toward the potential for future national debt crises and rising inflation. Of course, this time may be different. But don't bet on it.

자료 2: The Economist

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Recommendation:

Every so often, experts sucker people into bidding up the prices of stocks or real estate because they announce that the economy has fundamentally changed. As the aftermath of the real estate bubble illustrates, the basics of economics don’t really change, no matter what fantasies people come to believe. Economics professors Carmen M. Reinhart and Kenneth S. Rogoff present a thorough historical and statistical tour of financial hubris through the centuries, a postmortem that will make you wonder how anyone ever believed “this time is different.”

• The staid tone, formulas, charts and somewhat confusing organization make this fascinating history challenging to absorb.
• Yet, the content, which sweeps ambitiously and carefully across centuries and countries, rewards the persistent reader with many insights and gems, like the nation-by-nation appendix of fiscal history low points.
• getAbstract recommends this analytical overview to history buffs, investors, managers and policy makers who seek perspective on “financial folly.”

When You Hear “This Time Is Different,” Don’t Walk, Run

Every few decades, the economy’s major players develop bulletproof confidence in the efficiency of markets and the health of the economy. Known as “this-time-is-different syndrome,” this unrealistic optimism afflicted bankers, investors and policy makers before the 1930s Great Depression, the 1980s Third World debt crisis, the 1990s Asian and Latin American meltdowns, and the major 2008-2009 global downturn. Conditionsdiffered, but the same mindset – a dangerous mix of hubris, euphoria and amnesia – led to each of these collapses.

In each case, decision makers adopted beliefs that defied economic history. In the 1920s, conventional wisdom held that large-scale wars were a thing of the past, and that political stability and economic growth would replace the volatility of the years preceding World War I. Events quickly proved the optimists wrong. By the 1980s, economists were convinced that high commodity prices, low interest rates and reinvested oil profits would prop up the economy forever. Before the 2008 recession, popular thinking said globalization, better technology and sophisticated monetary policy would prevent an economic collapse. Every time, fiscal leaders thought they had learned history’s lessons and that this time the economy was different.

The most recent financial meltdown centered on the U.S. housing market, which regulators allowed to inflate despite a series of cautionary red lights. In 2005 and 2006, U.S. home price increases far outpaced growth in gross domestic product (GDP). In retrospect, home prices were clearly in a speculative bubble. Yet, even as inflation grew, former Federal Reserve Chairman Alan Greenspan argued that the econmomic situation was different. He theorized that financial breakthroughs like widespread securitization made real estate more liquid and supported rising prices. He waved off concerns about the massive U.S. current account deficit. While cash from China, Japan, Germany and elsewhere flooded into the U.S. as a safe haven, American consumers borrowed like never before.

Other influential leaders also downplayed the current account deficit. Greenspan’s successor, Ben Bernanke, and Treasury Secretary Paul O’Neill argued that high savings rates abroad and low savings rates at home were part of the natural order. But, not everyone was as sanguine. Nobelist Paul Krugman predicted an abrupt moment when the foolhardiness and “unsustainability” of America’s profligate international borrowing would become widely apparent. The trends gave reason for pause. The ratio of household debt to GDP hit 80% in 1993, rose to 120% in 2003 and rocketed to 130% in 2006. In this easy-money setting, lenders threw mortgages at some borrowers who couldn’t afford homes. Subprime borrowers were trapped when their loans’ initial low rates soon soared to unaffordable heights. The cool-handed analysis of a few high-profile contrarians like Krugman couldn’t stop the party. This-time-is-different syndrome was in full swing from 2005 to 2007. It manifested in several beguiling arguments, which seem foolish now:

• The U.S. has the world’s largest, most sophisticated financial markets, so it can handle massive inflows of capital.
• Developing economies will keep sending money to the U.S., which is a safe haven.
• Globalization sets the stage for higher leverage and larger debt loads.
• The U.S. has the best monetary policy institutions and policy makers.
• Innovative financial instruments unleash a solid, new demand for housing by allowing previously untapped borrowers to take out mortgages.

In truth, the warning signals were coming through loud and clear. To see just how near the U.S. economy came to an implosion, look at the 20th century’s “Big Five” crashes in developed economies: Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992. These meltdowns shared some common themes:

• Capital inflows predict financial crises – “Capital flow bonanzas,” as in the U.S. in 2005, characteristically preceded the Big Five crashes and, later, the 2008 subprime meltdown.
• A wave of financial innovation often leads to crisis – The creation of new mortgagerelated mechanisms intended to reduce risk boosted the 2005-2006 housing boom.
• A housing boom often portends a financial crash – Prices can take years to recover. After the Spanish, Norwegian, Finnish and Swedish crashes, home prices took four to six years to hit bottom. In Japan, real estate prices remained low 17 years after the boom.
• Financial liberalization often precedes a crisis – Throughout the 1980s and 1990s, financial crises almost inevitably followed spates of loosened financial regulation.

Strikingly, large, sophisticated financial markets are as prone to crashes as smaller, less-advanced markets. No real differences in length or severity distinguish crashes in less-developed nations (Indonesia, the Philippines, Argentina, Colombia) from those in developed economies (the U.S., the U.K., Japan). This should alarm those who claim that conditions are different in advanced markets.

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Avoiding the Next Crisis

By definition, this-time-is-different thinking is so infectious that it saps the will of those who might dampen the party. Even so, two steps could help avert repeat performances:

1. An early-warning system – Because financial crises follow established patterns, the world’s policy makers and investors need a warning system that alerts them to danger signs. For instance, an unusual rise in housing prices reliably predicts a banking crisis. While such signals aren’t precise enough to predict a crisis’s exact peak, they

can give a general indicator. Of course, this-time-is-different thinking means many decision makers ignore clear signs of trouble.

2. A regulatory scheme with teeth – When this-time-is-different syndrome takes hold, capital crosses borders in search of the lightest regulations. And regulators turn a blind eye to rules regarding leverage. To avoid future crises, regulators must take an international approach to regulation and enforce the rules – even when everyone believes that the situation truly is different this time.

자료 3: New Statesman

Credit where it’s due

The credit crunch of 2007 became the financial crash of 2008 and the recession of 2009. But there has been much debate about the scale of this crisis, and how it ranks against previous events. Reinhart and Rogoff have produced the most detailed study yet of financial crises, going back as far as 12th-century China.

• This is a quantitative and statistical analysis;
• it does not attempt to provide a historical narrative of crises, but rather seeks to lay bare their anatomy, by systematically assembling all the facts known about them.

The authors construct a large database of historical crises, and the book is copiously illustrated with tables and charts. There are a hundred pages of data appendices alone.

This book will be a vital source of reference in debates on the causes and consequences of financial crises. By cataloguing so thoroughly every known instance of financial crisis, it performs a significant service and opens up new lines of inquiry. In its first four parts the authors categorise different types of crisis and explore our varying historical experience of them. The last two parts are a self-contained exploration of what the authors call the "Second Great Contraction" - the sub-prime meltdown in the United States that began in 2007.

• The book contains some theoretical analysis, but that is not its primary purpose.
• It does not seek an overarching theory of financial crisis, and does not analyse the meaning of crisis in any great depth.

It defines crises mainly by quantitative thresholds and by certain events, and seeks to expose the patterns that different types of crisis exhibit. It carefully distinguishes between banking crises, inflation crises and debt crises, and the relationships between them. A banking crisis, for example, is defined by an event, such as a run on a bank, that leads to the government intervening to control or liquidate banks or forcibly amalgamate them. Debt crises can be either external or domestic, and involve governments defaulting on loans. What the book shows is just how widespread and recurrent such crises have been, and continue to be. This is a book of lists and tables, a must for anoraks everywhere. If you are at all uncertain about how many times Spain has defaulted in its history (answer: 13 - currently the world record), or what happened in the 1890 Barings crisis, this is the book for you.

It also contains a number of very interesting insights into the present financial meltdown. Reinhart and Rogoff present a mass of data to show that the events of 2007-2009 constitute a global financial crisis equalled only by 1929-32. They argue that it has been a transformative moment in global economic history that is likely to reshape politics and economics, in the way past crises have done. The effects of this slowdown will be particularly far-reaching, they think, because it is truly global. All emerging economies have suffered historically from all forms of financial crisis, yet although many of the more developed economies have reached a stage where they are no longer subject to defaults on their external debts, no economy is immune to banking crises.

In every cycle, at the top of the boom, many market agents, regulators, journalists and academics persuade themselves that this time it will be different, but it never is. The book argues that the warning signs of an impending financial meltdown were there for anyone to see, in the US, Britain, Spain and Ireland in particular. For example, between 1996 and 2006, the cumulative real-price increase in the US housing market was 92 per cent, more than three times the 27 per cent increase between 1890 and 1996. Yet numerous commentators produced ingenious reasons as to why facts such as these, and the spiralling of US external and domestic debt, were of no concern. Top prize goes to the theorists who argued before the crash that US foreign assets must have been wrongly calculated and must be actually far larger than official estimates. Sophisticated models were devised to explain this "dark matter" and how the US could finance its deficits indefinitely.

Reinhart and Rogoff also make chilling observations on the aftermath of severe financial crises. Asset market collapses are deep and prolonged, and are accompanied by steep declines in output and employment. At the same time government debt explodes, not primarily because of the cost of bailouts, but because of the collapse of tax revenues. The difficulty of managing all these developments at once is the reason that the effects on unemployment, house prices and output can be so long-lasting, extending for years rather than months. So far, China and India have been recovering very fast and growing rapidly, but their ability to continue doing so will depend on whether they can continue to avoid the spillover effects from the contraction in North America and Europe.

As Reinhart and Rogoff put it, "When a crisis is truly global, exports no longer form a cushion for growth." They admit that there is very little experience of global meltdowns, so we do not really know what to expect next from this one. The worst has so far been avoided by the quick and decisive actions of governments around the world. But if this book teaches us anything, it is that the effects of this crisis are going to be felt for a long time to come.

Andrew Gamble is professor of politics at the University of Cambridge. His latest book is "The Spectre at the Feast: Capitalist Crisis and the Politics of Recession" (Palgrave Macmillan, £14.99 paperback)

자료 4: businessweek,

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To me, one of the most important findings of the book is that generations of economists, right up to the present, have misunderstood the causes of sovereign defaults (i.e., when a country fails to make payments on its foreign debt). It turns out, they say, that a country is much more likely to default on its foreign debt if it’s carrying a lot of domestic debt. No wonder: A country will try repaying its own citizens (who vote) before it worries too much about foreign creditors (who don’t vote and, in any case, tend to be stupidly forgiving).

OK, the importance of domestic debt may not sound too surprising. What’s surprising, rather, is that this factor was completely neglected in most economists’ work. One reason: Governments have not made data about the quantities of their domestic debt available to researchers. Reinhart and Rogoff compiled it and are planning to make it available to other scholars.

One footnote: The U.S. does not have foreign debt, in the way that Reinhart and Rogoff use the term. Instead, it has lots of domestic debt (like Treasuries) that happened to be owned by foreigners. To them, foreign debt is debt that is issued in a foreign jurisdiction, usually in that foreign nation’s currency.

The U.S. can still stick it to foreign creditors by inflating the dollar so much that foreign-held Treasury bonds become close to worthless. That is exactly what the Chinese are worried about lately.