This Time Is Different: Eight Centuries of Financial Folly Paperback – Illustrated, August 7, 2011

Highly recommended essay on financial bubbles and the inevitable panics, crashes, and political fallout. This is an exhaustive regression analysis of every known financial bubble and crash throughout human history. The authors' conclusions are devastating. To summarize, every time you hear from an expert that "This Time, It's Different" or "The Old Rules No Longer Apply", take your money and RUN the other way as fast as you can. Belongs in your library of financial reference books.

Under ordinary circumstances, "This Time Is Different" would be of interest primarily to professional economists and students - but given the timing of its publication, smack dab in the middle of a financial crisis, the book has caught on with a wider audience.Go to a forum about the recent (or current?) financial crisis, and someone will probably brandish a copy in the air as though to say, "I read it." And at a May 26, 2010 meeting of the Fiscal Commission, which has been charged with proposing fixes to the nation's fiscal woes after the November elections, testimony of Professor Reinhart plus her responses to questions took up a goodly share of the 2-1/2 hour televised session. Ergo, people who are more interested in policy issues than in quantitative economic data may want to read the book just to be "in the know."In my case, the clincher was a personal recommendation from a friend who used to play chess with Professor Rogoff (but never managed to beat him).The basic thrust is to summarize and draw conclusions about financial crises from reams of historical data - a very different tack from Niall Ferguson's qualitative survey in "The Ascent of Money: A Financial History of the World," Penguin Press (2008). (Ferguson praises "This Time Is Different" in a jacket blurb, by the way, as making "a truly heroic contribution to financial history.") Be prepared for dozens of tables (data), figures (graphs), and boxes (sidebars), plus discussion thereof in the text - delivered without a lot of ideological baggage (which right away distinguishes this book from most of what has been written about the financial crisis). Such an approach lends credibility to the central theme, which must be articulated 100 times, that private and public policy makers are prone to forget the lessons of the past and take risks that will eventually backfire based on the assumption that they are smarter or luckier than their predecessors.For readers who would dispense with the historical background and get right to the present day situation, the authors suggest the option of starting with Part V, "The U.S. Subprime Meltdown and the Second Great Contraction." I elected not to do this, reading the book from start to finish, but did skip over some of the tables and figures.Here are some takeaways from the book, which are amply supported by the data presented:1. The basic cause of financial crises is debt, taken on in good times, which cannot be supported when reverses occur and/or lenders lose confidence. Sometimes the debt is issued by banks and other private firms (banking crisis), sometimes the debt is issued by governments (sovereign debt crisis), and not infrequently the second type of crisis follows the first.2. Banking crises have been experienced over the years by developing and developed countries alike, but until recently it was thought that developed countries had graduated from sovereign debt crises. It now appears that this conclusion may be wrong.3. The so-called "Second Great Contraction" is the first global financial crisis of the post-World War II era. It is necessary to go back to the Great Depression in the 1930s to find an economic crisis of comparable size and scope. Nevertheless, striking parallels exist between the current situation and lesser country or regional financial crises of the past 60+ years. Notably, the postwar data show that a banking crisis typically results in a big run-up (86% on average) in government debt over the next three years. (See Figure 10.10, page 170.) No wonder that a sovereign debt crisis often follows a banking crisis, and may yet do so in the current situation.4. Another important insight is a greater role for domestically held debt in government debt crises than had generally been assumed. Other analysts may have gone astray, apparently, because domestic debt data are harder to come by for many countries than external debt data. Factoring in domestic debt helps to explain why so many countries have experienced debt crises at what appeared to be manageable debt levels. Typically, governments are more reluctant to renege on domestic than external debt, for which reason debt crises involving domestic debt tend to be more pronounced and of longer duration.However, the data do not resolve the policy questions - they simply establish that the answers are important.A. As for whether the U.S. government should pull in its fiscal horns or continue trying to stimulate the economy in hopes of promoting a hopefully rapid recovery, the authors say (page 290) "the surge in government debt following a crisis is an important factor to weigh when considering how far governments should be willing to go to offset the adverse consequences of the crisis on economic activity." Well, that certainly settles the question!B. Can future financial crises be avoided, and if so how? The suggested answers boil down to demanding better data (Moody's ratings, etc., are ranked at the bottom of the spectrum), empowering some sort of international financial institution to ride herd on profligate national governments, and a lot more humility. Chapter 17.

If you are an investor, you need to read this book: "This Time is Different"The authors went through and captured data from around the world for the last 800 years to demonstrate that while financial crises are not identical, they do rhyme and have patterns that are recognizable. As someone with money on the sidelines because of all the shenanigans in the stock market (15 seconds front running, trade and cancel order in 65 microseconds), I am interested in how I should invest for my kids and retirement (if at all).The portions of the book that stood out are:(a) whenever banking crisis and housing bubble go hand in hand ("the twins") they tend to be very destructive as opposed to a pure stock bubble (e.g., internet bubble). See Table 10.8 at this [...]On average, these crises last 3-6 years except for Japan, which is still ongoing for 19 years. Equity price collapses on average 56% over a duration of 3.5 years. Unemployment is usually deep and prolonged, increasing by 7% over a four year period. Output drops on average 9% over an average of 2 years.(b) when the twins are synchronized, a sovereign debt crisis usually follows the twins. The typical sovereign debt crisis has the government exploding its debt by 86% either to bail out the bankers or to pump stimulus into the economy.You may remember that we had the banking and housing crash in 2008. In 2010, we are now seeing signs of a sovereign debt crisis so (a) and (b) are right on schedule ... for other countries at least. But (b) has not occurred in the US at least because (1) the dollar is the reserve currency (i.e., the Windows XP in a world without Apple Mac); (2) the dollar is backed by 6000 nuclear warheads; and (3) backed by 700+ military bases around the world. On the other hand, the US is borrowing as much money as all of the countries combined in 2010 alone. At some point, someone is going to yell "fire" and then we will have a full on sovereign crisis. For now, though, everyone is yelling fire in the Greek theater, Spanish theater, Irish theater, Portugal theater and so on so we're safe .... for now.The US' response to the crisis in 2008 was to do what Japan did and more. So don't expect this crisis to end in 3-7 years but may be much longer. This may be the first job-LOSS recovery because of the overcapacity of (1) labor in China and India; (2) manufacturing; and (3) housing. For an example, look to Japan where Japanese are outsourcing themselves into lower wage countries: [...]The authors end with the following empirical model for the crises in (a) and (b):Step 1 - financial liberalization. Any one with a breath can get a loan. NINJA loans (No-Income-No-Job-or-Asset)Step 2 - stock and real estate market crashes. Iceland in 2008.Step 3 - currency crash. This happened to Iceland in 2008.Step 4 - inflation picks up. Again Iceland in 2010. This has not happened yet in the US because the amount of debt $100Trillion is backed by only $1Trillion in physical dollar, hence deflation.Step 5 - peak of banking crisis - if there is no default of the banking system. The 6 US banks are too big to fail so this won't happen.Step 6 - default on external debt or domestic debt.Step 7 - inflation worsens, running 40%+ if step 6 occur.Personally, I believe that the financial, insurance, and real estate (the "FIRE sector") has metasized into a virulent form of cancer. This cancer, thanks to supercomputers and derivatives, will modify the above model as follows:Step 1 - financial liberalization.Step 2 - stock and real estate market crashes.STEP 3A - DEFLATION allowing bankers to buy up assets such as water purification plants, power plants, toll roads that our "betters" whom we have elected had loaded down with debts and derivatives.Step 4A - inflation picks up for these essential assets because only the banks have access to Uncle Ben Bernankio teller window. For the rest of us, deflation in jobs, housing, employment.Step 5A - the US becomes a corporate-kleptocracy like Italy or Spain.If you are not vigilant, your 201K will likely turn into a 101K so best to take the above model into consideration the next time you vote or invest.Best,KT"The issue which has swept down the centuries and which will have to be fought sooner or later is the People versus the Banks."Lord Acton - who, by the way, also wrote: "Power tends to corrupt, and absolute power corrupts absolutely"