This Time Is Different: Eight Centuries of Financial Folly
By Carmen M Reinhart and Kenneth S Rogoff
The credit crunch of 2007 became the financial crash of 2008 and the recession of 2009. But there has been much debate about the scale of this crisis, and how it ranks against previous events. Reinhart and Rogoff have produced the most detailed study yet of financial crises, going back as far as 12th-century China. This is a quantitative and statistical analysis; it does not attempt to provide a historical narrative of crises, but rather seeks to lay bare their anatomy, by systematically assembling all the facts known about them. The authors construct a large database of historical crises, and the book is copiously illustrated with tables and charts. There are a hundred pages of data appendices alone.
This book will be a vital source of reference in debates on the causes and consequences of financial crises. By cataloguing so thoroughly every known instance of financial crisis, it performs a significant service and opens up new lines of inquiry. In its first four parts the authors categorise different types of crisis and explore our varying historical experience of them. The last two parts are a self-contained exploration of what the authors call the "Second Great Contraction" - the sub-prime meltdown in the United States that began in 2007.
The book contains some theoretical analysis, but that is not its primary purpose. It does not seek an overarching theory of financial crisis, and does not analyse the meaning of crisis in any great depth. It defines crises mainly by quantitative thresholds and by certain events, and seeks to expose the patterns that different types of crisis exhibit. It carefully distinguishes between banking crises, inflation crises and debt crises, and the relationships between them. A banking crisis, for example, is defined by an event, such as a run on a bank, that leads to the government intervening to control or liquidate banks or forcibly amalgamate them. Debt crises can be either external or domestic, and involve governments defaulting on loans. What the book shows is just how widespread and recurrent such crises have been, and continue to be. This is a book of lists and tables, a must for anoraks everywhere. If you are at all uncertain about how many times Spain has defaulted in its history (answer: 13 - currently the world record), or what happened in the 1890 Barings crisis, this is the book for you.
It also contains a number of very interesting insights into the present financial meltdown. Reinhart and Rogoff present a mass of data to show that the events of 2007-2009 constitute a global financial crisis equalled only by 1929-32. They argue that it has been a transformative moment in global economic history that is likely to reshape politics and economics, in the way past crises have done. The effects of this slowdown will be particularly far-reaching, they think, because it is truly global. All emerging economies have suffered historically from all forms of financial crisis, yet although many of the more developed economies have reached a stage where they are no longer subject to defaults on their external debts, no economy is immune to banking crises.
In every cycle, at the top of the boom, many market agents, regulators, journalists and academics persuade themselves that this time it will be different, but it never is. The book argues that the warning signs of an impending financial meltdown were there for anyone to see, in the US, Britain, Spain and Ireland in particular. For example, between 1996 and 2006, the cumulative real-price increase in the US housing market was 92 per cent, more than three times the 27 per cent increase between 1890 and 1996. Yet numerous commentators produced ingenious reasons as to why facts such as these, and the spiralling of US external and domestic debt, were of no concern. Top prize goes to the theorists who argued before the crash that US foreign assets must have been wrongly calculated and must be actually far larger than official estimates. Sophisticated models were devised to explain this "dark matter" and how the US could finance its deficits indefinitely.
Reinhart and Rogoff also make chilling observations on the aftermath of severe financial crises. Asset market collapses are deep and prolonged, and are accompanied by steep declines in output and employment. At the same time government debt explodes, not primarily because of the cost of bailouts, but because of the collapse of tax revenues. The difficulty of managing all these developments at once is the reason that the effects on unemployment, house prices and output can be so long-lasting, extending for years rather than months. So far, China and India have been recovering very fast and growing rapidly, but their ability to continue doing so will depend on whether they can continue to avoid the spillover effects from the contraction in North America and Europe.
As Reinhart and Rogoff put it, "When a crisis is truly global, exports no longer form a cushion for growth." They admit that there is very little experience of global meltdowns, so we do not really know what to expect next from this one. The worst has so far been avoided by the quick and decisive actions of governments around the world. But if this book teaches us anything, it is that the effects of this crisis are going to be felt for a long time to come.
Andrew Gamble is professor of politics at the University of Cambridge. His latest book is "The Spectre at the Feast: Capitalist Crisis and the Politics of Recession" (Palgrave Macmillan, £14.99 paperback)