YET another boom and yet another bust. What have we learnt from the periodic economic downturns that have been happening world over? Nothing, say Carmen M. Reinhart and Kenneth S Rogoff, authors of This Time is Different: Eight Centuries of Financial Folly. They emphasise that nothing is different and yet during the boom, the cheerleaders always insist that this time it was for real and there would be no bang. And invariably the bang comes, like it did this time, taking down the whole global financial system by a few notches.
“Our basic message is simple: We have been here before. No matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities with past experience from other countries and from history” say the authors.
The one common theme to the economic crises is the excessive debt accumulation by the governments, banks, corporations or consumers. The book discusses various forms of financial crises and focuses mostly on two particular forms of crises. They are sovereign debt crises and banking crises. “Both have histories that span centuries and cut across regions. Sovereign debt crises were once commonplace among the new advanced economies that appear to have “graduated” from periodic bouts of government insolvency. In emerging markets however, recurring (or serial) default remains a chronic and serious disease. Banking crises, in contrast, remain a recurring problem everywhere. They are an equal-opportunity menace, affecting rich and poor countries alike” the book says.
The empirical analysis in the book covers 66 countries over nearly eight centuries. The core of the book forms the tables and data, which speak volumes.
The message ‘we have been here before’ is repeated by the authors who say “The instruments of financial gain and loss have varied over the ages, as have the types of institutions that have expanded mightily only to fail massively. But financial crises follow a rhythm of boom and bust through the ages. Countries, institutions and financial instruments may change across time, but human nature does not.´
The six-part book discusses issues relating to the fundamental reasons behind the financial crash downs, – bad debts, the external and domestic debt defaults, inflation, currency crashes, banking crises and above all the failure to read the warning though they blink quite brightly from time to time.
The tables, the figures and the notes together offer a formidable account of the financial crises of the last several centuries, making the book a solid source of reference. It is especially recommended for those cheerleaders and policy makers who applauded and egged on the institutions that were at the forefront of the boom of the 2000s, until the bubble burst. Publications like ‘The Economist’ were preening about the market leaders. Only that they turned out to be empty cardboard boxes. The people who read the warning signs and alerted about a possible crash can be counted by the fingers in one hand and they were brushed aside as ‘old stylists’ and ‘out of sync with time.’
The book points out the repeated failure of the financial institutions and the government policy making bodies and policy makers and guides who believed in their misplaced optimism and lies and mowed it down the throats of others. In the last part of the book titled ‘What have we learned’ the book says “In the run-up to the recent crisis, in the case of rich countries one of the main this-time-is-different syndromes had to do with a belief in the invincibility of modern monetary institutions. Central banks became enamored with their own versions of “inflation targeting,” believing that they had found a way both to keep inflation founded on some solid intuitional progress…”
“Technology has changed, the height of humans has changed, and fashions have changed. Yet, the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained constant.” The moral to be learnt is that, “Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.”
The theme, thrust and focus of this valuable book is the moral that every time a boom occurs, the players insist on ignoring the warning blinks right up to the brink. This includes not just the policy makers but the governments and financial institutions who are supposed to keep an eye on potential crisis. The book should be made a must read for the policy makers, especially in India where they blindly ape the western models and routes. Carmen M Reinhart is professor of economics at the University of Maryland and a regular lecturer at IMF and World Bank, and Kenneth S Rogoff is the Thomas D Cabot professor of Public Policy and professor of economics at Harvard University.
(Princeton University Press, 41, William Street, Princeton, New Jersey 08540,)
