This Time It's Different

"You stop sending me information, and you start getting me some."
--Gordon Gekko

Just finished Reinhart & Rogoff's (2009) book, This time is different: Eight centuries of financial folly. The authors are two econ profs, Carmen Reinhart at Maryland and Ken Rogoff at Harvard. The book is grabbing lots of press because a) it is a novel empirical study of over 200 financial crises of various types (debt defaults, banking crisies, currency collapses, inflations) that span about 800 yrs, and b) the prescient timing of its publication in the midst of our current financial crises--what they call The Second Great Contraction (the First Great Contraction is better known as the Great Depression).

The primary contribution of this book, as I see it, is the notion, reinforced by lots of data, that extreme levels of debt and leverage tilt finanical systems toward crisis.

However, I must admit that, unlike most of the scintillating reviews I've read about this book, I was a bit disappointed. For one thing, I think the title is misleading. The authors suggest that each of these crises corresponded w/ groupthink about the capacity of a country to navigate debt/leverage loads differently compared to the past. But this book is not a study of the collective mindset or social contexts that drove the extreme behavior that tipped situations toward crisis. Instead, it's a study of econometrics surrounding crisis points.

Banking crises represent a primary analytical category here, and the authors categorize the recent meltdown as mainly a banking crisis. However, they largely ignore multi-decade cumulative effects of activities in other categories, such as internal and external debt expansion and inflation, that may have played a role in tipping the system past the point of no return.

Moreover, I found their assessment of the causes of banking crises in general, and the current meltdown in particular, to be shallow and, frankly, typical of mainstream economists. Mobility of capital and regulatary failure, they argue, are primary drivers of banking crises. They largely ignore the question of where all the credit supply has come from over the past 200 yrs to spawn such leveraged states. And they do not consider the role of institutional factors (government sponsored banking insurance programs, interventions in housing markets, et al.) that signficantly distorted markets on their path to dislocation.

In short, they fail to seriously consider the notion that government intervention itself rests at the epicenter of these crises.

Not surprisingly, then, their solution is more regulatory oversight. An expanded role for the IMF and a set of crisis indicators that should be carefully monitored by bureaucrats are among their recommendations.

While Reinhart and Rogoff's (2009) data should elevate awareness of debt and leverage in finanical meltdowns, their superficial analysis of underlying causes limits the capacity of their work for driving meaningful change.

References

Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.