What is the history of financial crises? Why to they occur? Are they common? In the book This Time is Different, authors Reinhard and Rogoff assiduously review the history of government defaults and crisis of the financial system. Their data on government default is truly astounding. They document instance of government default in multiple ways: renegotiating the terms of a loan, failing to pay investors, and reducing the value of their debt through inflation or devaluation. Although defaults on external debt (from foreign investors) grab the of the headlines of the international media, default on domestic debt occurs as well.
Like most bubbles, the reason for these crisis is the delusion is that “this time is different.” Astronomical house prices relative to rent are interpreted as evidence of that past ideas of sound fundamentals are obsolete; highly leveraged investments of all types become more and more prevalent.
This is a book of economic history, but one where the last 5 chapters specifically examine how the conclusions drawn from centuries of historical data can be brought to bear to analyze the current Great Contraction. One of the points I found most interesting is that government debt almost always booms directly after a crisis, however, not for the reasons conventional wisdom ascribes. It is true that bailouts do add to this debt, but the main short term driver of booming U.S. debt is decreased tax revenues. During a financial crisis, the economy slows and tax receipts drop precipitously; hence the States’ recent request for more funding from the Feds.
This book is very worthwhile for economic historians and macroeconomists. The amount of evidence presented is overwhelming. The key points, however, are repeated over and over; after the first 100 pages, I felt I had already digested the main points. This is a book that I do recommend, even if I can’t say it was a page turner.
- Carmen M. Reinhart and Kenneth Rogoff (2009) This Time is Different, Princeton University Press, 463 pages.