This Time is Different: Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff
Long ago I took a class in economic history. It was taught in the history department, by visiting faculty not terribly well versed in economics.
Let me qualify that last bit. Not terribly well versed in the quantitative, equation-driven neo-classical post-Samuleson economics most often taught in the Econ department.This was the dry as toast version of what is a really interesting story.
As I recall, the supplementary texts, on which most of the coursework was based, contained page after page of tables. This somewhat dense tome has lots of tables, too. And while it’s a bit short for a tome at just 450 pages or so, the content earns it that moniker.
On the up side, there are only 292 pages of actual text and many of those are also tables. You only have to wade through the appendices if you care to and the authors acknowledge you may only want to read the section on the most recent crisis.
There’s one other reason I thought of that long ago class. In grading one of my papers the professor, Martin Torodash, scribbled ‘FW’ in the margin. “What’s this mean?,” I asked. “Forbidden word,” he replied. “You’re just trying to chew up half a line by saying ‘It is interesting to note that…’ If it’s really interesting show me how and stop wasting my time.” Good advice, although the delivery was a bit rough.
Professors Reinhart and Rogoff could have benefited from such marginalia.
I don’t think there’s a single chapter in which the authors are not ‘merchandising’ the data they are examining. To be fair they (or a legion of graduate students) did a yeoman’s chore in assembling economic data from around the world going back centuries. But almost every chapter has a sentence like this one (found by randomly opening the book): ” The perspective offered by the scale (across time) of our data set provides an important payoff in understanding defaults…” (p. 86)
I can’t help thinking they’d like to license the data to someone.
Our authors, though, are academics. And they have an almost naïve grasp of commerce that amuses me, them being economists. How can I say this about two PhDs, one of whom teaches at Harvard? Well, there’s the ham-fisted attempt at selling (which is my interpretation and perhaps not the authors’ intent). And then there’s the Acknowledgements page (p. XXXIX).
In an anecdote explaining the book’s title it’s uttered by a Wall Street trader in a situation that strikes the authors as particularly insightful. In reality, though, it’s just one of those allegedly witty things people in finance are taught early on.
Getting witticisms right, though, isn’t important if you’ve got something to add to the conversation. And I think the good professors do although it may not be of the magnitude they imagine. The book, I know, has quite a following among some Wall Street economists (which is how I first heard of it) but I also know those folks often have an ax (or closetful of axes) to grind.
The authors do a good job of disabusing the reader of the idea that financial crises are rare and unexplainable. In fact, crises seem to occur pretty regularly, regardless of the developmental state of the underlying economy and are almost always related to debt.
Debt looms large in these analyses. There’s sovereign debt held outside the country (think of all those US Treasury bonds held by China, for example). There’s sovereign debt held within the country (which would include the savings bonds my kids got when they were born) and there’s personal/corporate debt.
Now here’s the funny thing about debt: the folks lending the money expect to get repaid. I know, I’m oversimplifying. But at the end of the day that’s really the issue. If a country, or a person, has too much debt things get squirrelly. You don’t pay the gas bill so you can pay the water bill. You pay the mortgage but not the auto loan and the car gets repossessed. With national accounts the stakes are larger but the mechanism is essentially the same.
What the good professors have done with all this data collecting is demonstrate that there’s no such thing as a major financial crisis–one that cripples growth, closes banks and ultimately effects real people–without a debt problem. It’s the grain of truth at the center of it all. And it’s why we shouldn’t reflexively dismiss those people we think are wearing aluminum foil hats as they kvetch about unfunded liabilities and the national debt.
Much of what you’ll encounter here will be familiar if you have a decent grasp of history. For instance, 19th century US history–typically told as either two tales bridged by a horrific war or constant expansion and improvement–can also be told as a series of bank panics. And debt often lies at the heart of financial problems that plunged Europe into war over and over again, century after century.
You’ll also see the usual shenanigans to avoid paying. Hello, seigniorage, the age-old practice of currency debasement that favors the government. Hello, engineered inflation. Hello, renegotiated terms giving lenders steep haircuts. Hello outright default. (Maybe that should be hello Argentina.)
So what’s new? For me two things leapt off the page. The first was that in table after table, especially when the data being reported are more recent (20th century or more importantly, post WWII), the lowest numbers you encounter are for North America. Sometimes Europe is an also ran. The professors don’t say this, but it’s pretty stark illustration of what I what taught to label as “economic hegemony.”
I don’t necessarily want to revisit that argument; it tired me 35 years ago and I’m wearier now. But if you’ll allow me some latitude think of the economy as a collective social experience. If your collective social experience is unlike what others are experiencing–or even what your own society experienced in earlier times–isn’t your notion of reality going to be shaped by your first hand knowledge? Thought of that way American exceptionalism makes a lot more sense as a strongly and widely held belief.
The other point is a rough corollary. In this post-colonial world we risk missing the lingering cultural imprint of the colonial powers. When you look at the country data separated into continental regions you’ll notice an odd thing. Nations that were formerly British colonies have a better record of avoiding default and crisis than formerly Spanish colonies. And Spain was the early bad apple of the European debt markets.
Readers may remember me speaking of David Hackett Fisher. That great historian has touched the economic sphere (see The Great Wave) but he also demonstrated how cultural patterns, even regional folkways, are transported wholesale to colonial environments. If it’s true that people bring their preferred styles of housing, dress, eating and adornment with them, why would we expect their financial habits to remain at home?
There’s a lot to chew on in this work, even if it never really lives up to its subtitle. Just don’t expect it to be light reading.