'This Time is Different' by Carmen M. Reinhart & Kenneth S. Rogoff
[Cross-posting latest book summary I added to LinkedIn.]
For what was undoubtedly first conceived as an academic book, I found This Time is Different (http://www.amzn.com/0691142165) to be surprisingly readable with many helpful graphs and charts. It explores the history of financial crises from the perspective of two basic premises:
1) Economists have lacked a comprehensive database that contains sufficient geographic and temporal scope to effectively perform broad-based crisis analysis in a quantitative way.
2) Crisis episodes are often preceded by a pervasive sense of 'this time is different' as participants believe they can ignore the patterns and signals of earlier episodes because people are wiser, markets are stronger, macroeconomic policies are better, etc.
Reinhart and Rogoff define a financial crisis as consisting of one or more events where a sovereign country defaults on some aspect of its debt or where bank failure rates, inflation increases or currency crashes achieve certain threshold levels.
The authors then outline how they painstakingly assembled for the first time the sort of database necessary to analyze these events across many countries and over long time horizons. Some of this data goes back eight centuries, though their core set focuses on sixty-six countries between 1800 and the present. An important goal was to have countries represented from all continents and at varying stages of market development.
Most of the book is devoted to reviewing crisis events through the lens of their data to identify themes. One conclusion is that while many countries seem to learn how to avoid sovereign defaults as they become advanced economies, the evidence indicates that the other crisis types - especially banking problems - remain a recurring problem for all. Thus, there really is no empirical basis for the 'this time is different' aspect of human nature. Another grim conclusion is that the level of debt a country has in the aftermath of a banking crisis rises 86% on average while the time required for asset prices and output to return to pre-crisis levels can be quite protracted.
The last part of the book explores the most recent global financial crisis - what the authors term the 'Second Great Contraction' - based upon the earlier research and with specific comparisons to the Great Depression. However, since the book was completed in 2009, this exploration is only partial as the full story continues to unfold there. It would be helpful to have this subject revisited in a few years.
The book is designed to support a certain amount of skipping around and targeted reading (for instance some people may just want to read the chapters on the current global crisis). While this style of organization has its advantages, it does introduce some annoying repetition when reading from start to finish. Another minor irritation to me is that there are a few inconsistencies between the text and the charts/graphs and so more rigorous proofreading would have been helpful.
Carmen Reinhart was a guest on EconTalk shortly after the book was published and her interview (http://www.econtalk.org/archives/2009/11/reinhart_on_fin.html) is a worthwhile hour long discussion on its themes and implications.
