Carmen M. Reinhart

This book has been widely praised for its quantitative analysis of financial crises going back 100 years or more, which it uses to put our own current (and very serious) crisis into perspective. It is written for readers with a general knowledge of economics, and the authors suggest those primarily interested in the current crisis start reading at Chapter 13. The first twelve chapters describe and explain the authors' model and seemed designed primarily defend their work within the academy. show more They will certainly interest economic historians, who in the past have relied on less quantitative analyses such as Charles Kindleberger's classic “Manias, Panics, and Crashes.” Overall, it's an excellent study, and deserves a much wider readership than it will receive.

Being good academic economists (rather than policy pundits), the authors are careful in their conclusions, but they take a strong stand on a few issues. One, of course, is that the siren song of “this time is different” always leads to fatal outcomes. They demonstrate that such arguments, whether justifications for huge, destabilizing inflows of foreign investment (which inevitably reverse course at some point) or confident claims that burgeoning debt balances are based on new valuations for risk and investment (and thus are safer than in the past), invariably prove to be wishful thinking. They offer no solutions for this problem; in fact, they are quite pessimistic that such behavior can be changed. As they put it: “The fading memories of borrowers and lenders, policy makers and academics, and the public at large do not seem to improve over time, so the policy lessons on how to 'avoid' the next blow-up are at best limited.” They suggest some useful warning indicators, but doubt they will prevent future crises.

A second conclusion takes aim at the “belief in the invincibility of modern monetary institutions,” in particular central banks' obsession in the past few decades with inflation targeting. They are not suggesting that keeping inflation low is a bad thing, but rather that central banks have come to view it as an end in itself, a solution to the volatility of the business cycle. What this has meant in practice they illustrate with their description of the “Greenspan put.” That is, “the (empirically well-founded) belief that the U.S. central bank would resist raising interest rates in response to a sharp upward spike in asset prices (and therefore not undo them) but would react vigorously to any sharp fall in asset prices by cutting interest rates to prop them up.” This, the authors conclude, led markets to believe (accurately, as it turned out), that the Fed would do nothing to spoil the party in financial markets, and would bail out the party-goers if things went to hell. They reasonably conclude that “in hindsight, it is now clear that a single-minded focus on inflation can be justified only in an environment in which other regulators are able to ensure that leverage (borrowing) does not become excessive.” Which is another way of saying that inflation-targeting policies become increasingly dangerous as corporate-sponsored deregulation (such as we've witnessed steadily since the 1980s) weakens government supervision. show less

An interesting empirical macroeconomic book targeted towards a popular audience. Very readable and not as long as it looks, because of the extensive use of tables, and graphs that stretches the physical length of the book. As a threshold matter, the book does not use the controversial data that created a bit of a stir in the academic community. Some of Reinhart/Rogoff's other empirical work purported to show that high debt levels were correlated with slow growth, but some other economists show more had challenged this by purporting to show coding errors in the dataset (https://www.newyorker.com/news/john-cassidy/the-reinhart-and-rogoff-controversy-a-summing-up) [How do you know a macroeconomist has a sense of humor? She adds a decimal place to her estimates]. That data does not show up in this book, and that analysis is not mentioned in this book. However, it is fair that the skeptical reader may think that the same habits/methods that lead to alleged coding errors in that analysis may extend over to the dataset used in this book (but as far as I'm aware, there has been no such allegations).

The book is readable and an enjoyable review of macroeconomics. It is mostly empirical, and relies heavily on a massive unprecedented dataset that the authors have put together that span centuries (though the bulk of the analysis focuses on the 20th century, with a secondary focus on the 19th century. The claim to "eight centuries" is a bit of a marketing gimmick, since the data only extends that far by including a few rather ancient discrete illustrations of currency debasement). Much of the book is creating categories (such as types of crisis), counting occurrences, finding correlations and constructing interesting indexes (like a measure of global crisis by counting crisis experienced on a geographical scope). This can get a little unsatisfying sometimes, because it's somewhat rote and since some data can be extremely spotty. However, here and there, there are short succinct explanations of theory when it ties into the empirical analysis. In particular, I enjoyed learning about Krugman's theory that hard peg fixed foreign currency exchange rates are prone to failure because of the lack of political will power to impose internal constraints to maintain the exchange rate, Bernanke's theory that the Great Depression hit hard and last long because of its crippling of the financial lending sectors which froze credit to businesses, and the multiple equilibrium theory of debt lending (because countries can rely on their tax base to borrow money, default never occurs from lack of ability to pay, but from a complex interaction between a lack of a willingness to repay [and with the loss of gunboat diplomacy, there's no real way to force them to meet their obligations, and notions of fairness can influence the decision to repay (relevant to "odious debt")], and the unwillingness of the international credit market to roll over debt. As a result of these interactions there are actually multiple theoretical fragile equilibrium points making it hard to predict sovereign crisis).

The dataset which stretches over such a long time period has some interesting implications. For one, many stereotypes about the economic stability/instability of regions are wrong when looking at the region through the lens of a larger time span. For example, many "advanced" nations frequently defaulted from their sovereign debt obligations in their early days before "graduating" to nations that rarely default. And unlike sovereign debt crisis, no country has graduated from banking crisis (as 2008 shows). Another interesting pattern that occurs in the data, is that banking crisis are frequently preceded by large capital inflows into countries (either from de-regulation of the financial sector or freeing of capital constraints) [and on a more general level the clustering of different types of financial crisis because of their relationships to each other]. Somewhat surprisingly, the authors explain that there has been a lack of scholarship on domestic debt relative to the scholarship on external debt. Part of the issue is the spotty data caused by government in-transparency. The authors collect some preliminary data on domestic debt and argue that it could be the missing explanation for some otherwise unexplainable external debt defaults/inflation crisis (inflation is one way to effectively default on debt without a formal default). A running theme of the book is "this time is different" mentality, where people make an argument about a "new" economy that somehow freed from old constraints and concerns lead excessive debt accumulation which leads to a crisis. The authors imply that a broader view of history, for example stepping back and observing datasets that run for centuries reveal patterns that could help ameliorate this time is different mentality. show less

It is hard to imagine that anyone with even the slightest awareness of economic issues has failed to notice two things that have occurred over the last several years: (1) governments around the world have been borrowing breathtaking amounts of money and (2) the central banks in those countries have pumped a profligate amount of new currency into the financial system in order to support that borrowing by keeping interest rates low. Whether you think these actions are remarkable or mundane show more probably comes down to how you would answer the following question: Does debt—particularly sovereign-level borrowing—really matter?

Throughout this engaging volume, noted economists Carmen Reinhart and Kenneth Rogoff make a persuasive case that the answer to that question is a resounding “yes”. Further, the authors argue that how a sovereignty borrows (i.e., from foreign investors or from its own citizens) as well as how it chooses to default on its loans (e.g., currency debasement, inflation propagation, restructured borrowing terms) also matter when it comes to the country’s future growth prospects and access to capital markets.

As its title suggests, the overall theme of the book is that governments and investors alike keep repeating the mistaken economic policies of the past under the assumption that “this time is different” (e.g., the more sophisticated market structures today allow us to control economic outcomes better than in the past, so we can borrow more without consequence). Using a dizzying array of data tables and charts, Reinhart and Rogoff examine the causes and aftermaths of several hundred years of financial crises and sovereign-level defaults and end up concluding that, in fact, this time is not different in ways that ultimately matter. They finish their analysis with a discussion of the root causes of the recent sub-prime debt crisis, which they term the Second Great Contraction (after the Great Depression of the 1930s).

I should note that neither the subject matter nor the expositional style in this book makes for the easiest reading experience. That said, though, the authors do a very nice job in the volume of taking an extraordinary amount of primary academic research—much of it their own—and translating into a more digestible form. There are definitely redundancies throughout the various topics they cover, but Reinhart and Rogoff provide the reader with considerable guidance as to what sections or chapters can be skipped without loss of continuity. Overall, I found this to be a well-executed book with an important message to convey about the current state of global economic affairs. show less

"This time is different" offers the data necessary to point out, sorry, you're not so special. I love the books many data tables that include countless stories untold, which is also the book's main weakness. Its great collection and presentation of empiric crisis data makes the missing data on the surrounding political economy all too conspicuous. After all, the sovereign and internal debt crises and banking crises are the result of economic and political mismanagement. Reinhart and Rogoff show more are in the business of body counting at the scene of the crime. The perpetrators are left out of the picture. Hopefully, somebody will add them soon, although, like unhappy families, it will be difficult to assign them to simple categories. War is certainly one activity that seldom pays and often triggers crises.

One puzzle of the book seems to be the lenders' willingness to finance serial defaulters such as Greece. A hard-nosed look at the Greek track record should have discouraged even the most eager banker. In one of The Economist's Xmas issues was a great article about the Russians serially fleecing Western creditors through the centuries. The magic of "This time is different" is unbreakable. One wonders why the continuous currency debasement of most kings (actually an indirect form of taxation) didn't trigger offsetting waves of inflation. How can Reinhart/Rogoff's longterm view be blended into short-term thinking?

With two years hindsight, the text offers a good standard overview of sovereign and internal debt crises as well as banking crises. Recommended. show less