This Time Is Different: Eight Centuries of Financial Folly by Carmen M. ReinhartThis Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart

This Time Is Different: Eight Centuries of Financial Folly

byCarmen M. Reinhart

Paperback | August 7, 2011

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Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned.

Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.

An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

Carmen M. Reinhart is the Dennis Weatherstone Senior Fellow at the Peterson Institute for International Economics. She was previously professor of economics at the University of Maryland. Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University. He is a frequent commentator f...
Title:This Time Is Different: Eight Centuries of Financial FollyFormat:PaperbackDimensions:512 pagesPublished:August 7, 2011Publisher:Princeton University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0691152640

ISBN - 13:9780691152646

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Rated 5 out of 5 by from Outstanding Overview of Financial Crises This book is different; already an important and oft-cited contribution to our understanding of financial crises, it will likely endure as both a turning point and a benchmark for economists and policymakers alike. Reinhart and Rogoff compile and synthesize centuries of economic data, draw both facts and inferences, and offer some predictions as to how the global financial crisis that began in 2006 with the US housing collapse might continue to unfold. A truly remarkable and important work. It requires some effort to read, but at the authors’ suggestion readers can skim or skip some of the more technical parts with no loss of continuity. In fact, those with an interest in only the recent financial crisis can read just the final chapters (13-17) and be well rewarded for their time. Because it is primary research and because of its analytical rigour, this is first and foremost an academic text. Unlike most academic works, though, it is bereft of formulas and statistical analyses, instead relying on readers’ familiarity with a bit of (economic) history and geography. This is the first work to compile such an extensive set of economic data (sixty six countries over almost eight centuries), and differs substantially from earlier academics’ work such as Charles Kindleberger’s Manias, Panics and Crashes, which had previously stood as the best chronicle (i.e. not ‘analysis’) of financial folly. In Reinhart and Rogoff’s book, successive sets of historical data are explained and inferences or lessons drawn. As the lessons progress, we see that indeed it never is different; financial folly has endured for centuries and the card houses have fallen each time. The authors identify four types of crises: sovereign defaults (domestic and international), banking crises, exchange rate crises, and very high inflation (above 20% annually). Each is explained in detail in different sections or chapters, with additional chapters focussing specifically on the recent sub-prime mortgage meltdown and some prescriptions for today’s policy makers. With respect to recent policies, Reinhart and Rogoff note that financial sector deregulation results in increased risk taking, and state that “financial innovation is a variant of the liberalization process.” Banks’ self-congratulatory statements about the societal benefit of decades of new financial products suddenly appear in a different light; not just risk management tools (and profitable products for banks), but rather contributors to increased systemic risk. Turning their attention to the inevitable systemic collapse and resultant ballooning government debt levels, the authors note “on average government debt rises by 86% during the three years following a banking crisis.” While the debt levels may be alarming, it appears they are the inevitable short run consequence of a debt bubble. So it’s not different this time after all: financial bubble, ballooning government debt, and then ... inflation? For those who worry about a recurrence of inflation, the authors illustrate the remarkable similarity over the centuries (even millennia) of currency debasement (the dilution of precious metal content or size of coins) and the modern era’s periodic high inflation. In their words “inflation and default are nothing new; only the tools have changed.” The chart accompanying this section showing 500 years of annual inflation rates is truly astounding, and shows one consistent pattern to the early 1900s, and a quite different one from then on. What changed a century ago to cause this shift; the advent in the US and elsewhere of central banking, the rapid development of our modern fractional reserve banking system, or perhaps the increase leverage? A remarkable and thought provoking book providing a sweeping historical overview, thoughtful analysis, and relevant commentary on our current economic and financial situation.
Date published: 2013-04-05
Rated 4 out of 5 by from Not for the weak hearted This is a hard slog even for a professional economist. The authours spend far too much time on the data sources and similar issues. None the less they do distill the historical information into a number of very pointed observations. In the end you come away with a clear understanding of what drives recurrent financial crisis.
Date published: 2009-12-08

Table of Contents







PART I: Financial Crises: An Operational Primer 1

Chapter 1: Varieties of Crises and Their Dates 3

Crises Defined by Quantitative Thresholds: Inflation, Currency Crashes, and Debasement 4

Crises Defined by Events: Banking Crises and External and Domestic Default 8

Other Key Concepts 14

Chapter 2: Debt Intolerance: The Genesis of Serial Default 21

Debt Thresholds 21

Measuring Vulnerability 25

Clubs and Regions 27

Reflections on Debt Intolerance 29

Chapter 3: A Global Database on Financial Crises with a Long-Term View 34

Prices, Exchange Rates, Currency Debasement, and Real GDP 35

Government Finances and National Accounts 39

Public Debt and Its Composition 40

Global Variables 43

Country Coverage 43

PART II: Sovereign External Debt Crises 49

Chapter 4: A Digression on the Theoretical Underpinnings of Debt Crises 51

Sovereign Lending 54

Illiquidity versus Insolvency 59

Partial Default and Rescheduling 61

Odious Debt 63

Domestic Public Debt 64

Conclusions 67

Chapter 5: Cycles of Sovereign Default on External Debt 68

Recurring Patterns 68

Default and Banking Crises 73

Default and Inflation 75

Global Factors and Cycles of Global External Default 77

The Duration of Default Episodes 81

Chapter 6: External Default through History 86

The Early History of Serial Default: Emerging Europe, 1300-1799 86

Capital Inflows and Default: An "Old World" Story 89

External Sovereign Default after 1800: A Global Picture 89

PART III: The Forgotten History of Domestic Debt and Default 101

Chapter 7: The Stylized Facts of Domestic Debt and Default 103

Domestic and External Debt 103

Maturity, Rates of Return, and Currency Composition 105

Episodes of Domestic Default 110

Some Caveats Regarding Domestic Debt 111

Chapter 8: Domestic Debt: The Missing Link Explaining External Default and High Inflation 119

Understanding the Debt Intolerance Puzzle 119

Domestic Debt on the Eve and in the Aftermath of External Default 123

The Literature on Inflation and the "Inflation Tax" 124

Defining the Tax Base: Domestic Debt or the Monetary Base? 125

The "Temptation to Inflate" Revisited 127

Chapter 9: Domestic and External Default: Which Is Worse? Who Is Senior? 128

Real GDP in the Run-up to and the Aftermath of Debt Defaults 129

Inflation in the Run-up to and the Aftermath of Debt Defaults 129

The Incidence of Default on Debts Owed to External and Domestic Creditors 133

Summary and Discussion of Selected Issues 136

PART IV: Banking Crises, Inflation, and Currency Crashes 139

Chapter 10: Banking Crises 141

A Preamble on the Theory of Banking Crises 143

Banking Crises: An Equal-Opportunity Menace 147

Banking Crises, Capital Mobility, and Financial Liberalization 155

Capital Flow Bonanzas, Credit Cycles, and Asset Prices 157

Overcapacity Bubbles in the Financial Industry? 162

The Fiscal Legacy of Financial Crises Revisited 162

Living with the Wreckage: Some Observations 171

Chapter 11: Default through Debasement: An "Old World Favorite" 174

Chapter 12: Inflation and Modern Currency Crashes 180

An Early History of Inflation Crises 181

Modern Inflation Crises: Regional Comparisons 182

Currency Crashes 189

The Aftermath of High Inflation and Currency Collapses 191

Undoing Domestic Dollarization 193

PART V: The U.S. Subprime Meltdown and the Second Great Contraction 199

Chapter 13: The U.S. Subprime Crisis: An International and Historical Comparison 203

A Global Historical View of the Subprime Crisis and Its Aftermath 204

The This-Time-Is-Different Syndrome and the Run-up to the Subprime Crisis 208

Risks Posed by Sustained U.S. Borrowing from the Rest of the World: The Debate before the Crisis 208

The Episodes of Postwar Bank-Centered Financial Crisis 215

A Comparison of the Subprime Crisis with Past Crises in Advanced Economies 216

Summary 221

Chapter 14: The Aftermath of Financial Crises 223

Historical Episodes Revisited 225

The Downturn after a Crisis: Depth and Duration 226

The Fiscal Legacy of Crises 231

Sovereign Risk 232

Comparisons with Experiences from the First Great Contraction in the 1930s 233

Concluding Remarks 238

Chapter 15: The International Dimensions of the Subprime Crisis:

The Results of Contagion or Common Fundamentals? 240

Concepts of Contagion 241

Selected Earlier Episodes 241

Common Fundamentals and the Second Great Contraction 242

Are More Spillovers Under Way? 246

Chapter 16: Composite Measures of Financial Turmoil 248

Developing a Composite Index of Crises: The BCDI Index 249

Defining a Global Financial Crisis 260

The Sequencing of Crises: A Prototype 270

Summary 273

PART VI: What Have We Learned? 275

Chapter 17: Reflections on Early Warnings, Graduation, Policy Responses, and the Foibles of Human Nature 277

On Early Warnings of Crises 278

The Role of International Institutions 281

Graduation 283

Some Observations on Policy Responses 287

The Latest Version of the This-Time-Is-Different Syndrome 290


A.1. Macroeconomic Time Series 295

A.2. Public Debt 327

A.3. Dates of Banking Crises 344

A.4. Historical Summaries of Banking Crises 348





Editorial Reviews

"A classic."-Nouriel Roubini