Carmen Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly — August 20, 2010

Carmen Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly

Neat cover. Avocado-green background, with a cartoon image of a man in a suit who is free-falling through the sky. His briefcase has detached from his hand, it's open, and there are papers flying out. The papers are scattering to the winds, and one of those papers carries the book's title and authors.
This book is selling very well and has initiated lots of conversations, so I can’t say that it’s a failure. Its authors are in high demand all over the place for their observations on the current economic crisis. Good for them. If I were a policymaker, I’d probably really like this book. As an educated lay reader, it turns out this isn’t the book for me.

It’s more of a compendium — an almanac, really — of financial statistics, with not very much narration layered atop. What it brings to the world is a large database of financial crises, painstakingly compiled from lots of sources. The data mostly span 200 years in the cases of banking crises and international defaults, reaching the full 800 years advertised in the subtitle only in the cases of things like hyperinflation or currency debasement. It’s interesting, but it’s not the kind of thing you want to take with you on a bus ride.

It is, with some justice, focused on the misbehavior of governments. We start out learning about government external defaults — reneging on debts owed to foreign governments. Reinhart and Rogoff note one outstanding puzzle: why do governments default when, in many cases, their debt-to-GDP or debt-to-revenue ratio is not terribly high (c. 10% or 20%)? If you examine also their *internal* defaults, Reinhart and Rogoff note that a lot of the puzzle goes away: governments often default to external partners when they can’t afford to pay their domestic creditors, either. But governments have an advantage over their domestic creditors in a way that they don’t over their external partners: they can put domestic creditors in jail, or kill them. It’s much harder to collect data on internal defaults, if only because such defaults will often be hidden beneath executions.

Governments have other tricks to get out of paying off their debts. One way is to hyperinflate the economy, thereby inflating their way out of debt. Another, similar way is to debauch the currency; this has been happening for hundreds, if not thousands of years, the earliest examples involving slicing tiny bits off gold and silver coins and decreeing that the coins are worth what uncut ones were. The invention of paper “fiat currency,” Reinhart and Rogoff note, has been a boon for rulers who want to inflate their money: it’s much easier to print more paper than it is to adulterate gold coins. No country has avoided defaulting on its debts by inflating its currency; the U.S. did so, rather stealthily, when it went off the gold standard after World War I.

The final category of “financial folly” that Reinhart and Rogoff tackle are the banking crises. The world thought we’d figured out how to avoid these — through banking-insurance systems like the FDIC — until the “shadow banking” system did us in during the current crisis.

In all these cases, Reinhart and Rogoff make a thorough, detailed case that there is nothing new under the sun: the crises that we had hundreds of years ago are the same ones we have now and the same ones we’ll probably have hundreds of years from now. There’s some slight hope that economic knowledge really will improve our policies, but it’s only slight.

Being largely a compendium of charts — typically one every other page, or more — the biggest sin this book commits is that the charts are just not that readable. My kingdom for some bolding in the chart captions; as it was, my eye flailed around on every chart, trying to pick out the things I was supposed to read. Each chart came with a hefty caption, detailing the many sources where its numbers came from. Each chart was subtly different: raw billions, percent of GDP, counts of crises since some specified time. Tons and tons of charts to read, yet the amount of time devoted to designing the charts was clearly much less than that devoted to the book’s overall design — which is *gorgeous*. (I let Princeton University Press know, by way of Twitter, how beautiful this book is; they thanked me, and told me that they’d pass along the good word to their designer. I’m happy to hear that; I don’t imagine book designers get much credit, usually.)

If you’re a policymaker, you probably want to read this book. Though I wonder if your time would be better spent with something like Dean Baker’s [book: Plunder and Blunder]; it’s short, and it contains a few rules of thumb to detect bubbles: principally price-to-earnings ratios above a certain threshold and property values growing very much at all. [book: This Time Is Different] seems like it will turn out to be more useful for the data it’s compiled, which others will put to use preventing future bubbles. It may not be a practical tool on its own.