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This Time is Different: 800 yrs of Financial Folly: preface Carmen M. Reinhart & Kenneth S. Rogoff

This Time is Different: 800 yrs of Financial Folly: preface Carmen M. Reinhart & Kenneth S. Rogoff

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Published by James Dwyer
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. This book proves that premise 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 professor of economics at the University of Maryland. She recently coedited The First Global Financial Crisis of the 21st Century and is a regular lecturer at the International Monetary Fund and the World Bank. Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University. He is the coauthor of Foundations of International Macroeconomics, and a frequent commentator for NPR, the Wall Street Journal, and the Financial Times.

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. This book proves that premise 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 professor of economics at the University of Maryland. She recently coedited The First Global Financial Crisis of the 21st Century and is a regular lecturer at the International Monetary Fund and the World Bank. Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University. He is the coauthor of Foundations of International Macroeconomics, and a frequent commentator for NPR, the Wall Street Journal, and the Financial Times.

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categoriesTypes, Research, History
Published by: James Dwyer on Sep 25, 2009
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Copyrighted Material
P
REFACE
T
his book provides a quantitative history of financial crises in theirvarious guises. Our basic message is simple: We have been here before. No matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities with pastexperience from other countries and from history. Recognizing theseanalogies and precedents is an essential step toward improving ourglobal financial system, both to reduce the risk of future crisis and tobetter handle catastrophes when they happen.If there is one common theme to the vast range of crises weconsider in this book, it is that excessive debt accumulation, whetherit be by the government, banks, corporations, or consumers, oftenposes greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growthto its economy than it really is. Private sector borrowing binges caninflate housing and stock prices far beyond their long-run sustainablelevels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they makean economy vulnerable to crises of confidence, particularly whendebt is short term and needs to be constantly refinanced. Debt-fueledbooms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or acountry’s standard of living. Most of these booms end badly. Of course,debt instruments are crucial to all economies, ancient and modern,but balancing the risk and opportunities of debt is always a challenge,a challenge policy makers, investors, and ordinary citizens must neverforget.
 
Copyrighted Material
PREFACE
In this book we study a number of different types of financialcrises. They include sovereign defaults, which occur when a government fails to meet payments on its external or domestic debt obligations or both. Then there are banking crises such as those the worldhas experienced in spades in the late 2000s. In a typical major banking crisis, a nation finds that a significant part of its banking sectorhas become insolvent after heavy investment losses, banking panics,or both. Another important class of crises consists of exchange ratecrises such as those that plagued Asia, Europe, and Latin America inthe 1990s. In the quintessential exchange rate crisis, the value of acountry’s currency falls precipitously, often despite a government“guarantee” that it will not allow this to happen under any circumstances. We also consider crises marked by bouts of very high inflation. Needless to say, unexpected increases in inflation are the defacto equivalent of outright default, for inflation allows all debtors(including the government) to repay their debts in currency that hasmuch less purchasing power than it did when the loans were made.In much of the book we will explore these crises separately. But crisesoften occur in clusters. In the penultimate text chapter of the bookwe will look at situations—such as the Great Depression of the 1930sand the latest worldwide financial crisis—in which crises occur inbunches and on a global scale.Of course, financial crises are nothing new. They have beenaround since the development of money and financial markets. Manyof the earliest crises were driven by currency debasements that occurred when the monarch of a country reduced the gold or silver content of the coin of the realm to finance budget shortfalls oftenprompted by wars. Technological advances have long since eliminated a government’s need to clip coins to fill a budget deficit. But financial crises have continued to thrive through the ages, and theyplague countries to this day.Most of our focus in this book is on two particular forms of crises that are particularly relevant today: sovereign debt crises andbanking crises. Both have histories that span centuries and cut acrossregions. Sovereign debt crises were once commonplace among the nowadvanced economies that appear to have “graduated” from periodicxxvi
 
Copyrighted Material
PREFACE
bouts of government insolvency. In emerging markets, however, recurring (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 countries alike. Our banking crisis investigation takes us on a tour frombank runs and bank failures in Europe during the Napoleonic Warsto the recent global financial crises that began with the U.S. sub-prime crisis of 2007.Our aim here is to be expansive, systematic, and quantitative: our empirical analysis covers sixty-six countries over nearlyeight centuries. Many important books have been written about thehistory of international financial crises,
1
perhaps the most famous of which is Kindleberger’s 1989 book
Manias, Panics and Crashes.
2
Byand large, however, these earlier works take an essentially narrativeapproach, fortified by relatively sparse data.Here, by contrast, we build our analysis around data culledfrom a massive database that encompasses the entire world and goesback as far as twelfth-century China and medieval Europe. The core“life” of this book is contained in the (largely) simple tables and figures in which these data are presented rather than in narratives of personalities, politics, and negotiations. We trust that our visualquantitative history of financial crises is no less compelling than theearlier narrative approach, and we hope that it may open new vistasfor policy analysis and research.Above all, our emphasis is on looking at long spans of historyto catch sight of “rare” events that are all too often forgotten, althoughthey turn out to be far more common and similar than people seem tothink. Indeed, analysts, policy makers, and even academic economistshave an unfortunate tendency to view recent experience through thenarrow window opened by standard data sets, typically based on a narrow range of experience in terms of countries and time periods. Alarge fraction of the academic and policy literature on debt and default draws conclusions based on data collected since 1980, in no smallpart because such data are the most readily accessible. This approachwould be fine except for the fact that financial crises have much longercycles, and a data set that covers twenty-five years simply cannot givexxvii

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