This is my eighth book review on the financial crisis. To see my previous seven reviews see my previous articles. My most recent book is This Time is Different by Kenneth Rogoff and Carmen Reinhart. Dr Rogoff is a professor of economics at Harvard University, and Dr Reinhart is a professor of economics at the University of Maryland.
The authors document financial crises that occurred over the past several hundred years. The authors discuss various topics such as currency debasement, banking crises, Default (both domestic and foreign), exchange rate crises, and inflation. All these issues are interrelated and many times all these factors will converge at once.The authors dispel the misconception that there is an difference between emerging markets and developed economies in this regard.
The main theme of the book is that every time a bubble develops in a country whether emerging market or developed the thinking is the bubble will never burst. The authors describe this attitude as “This Time is Different”. The argument usually goes that our financial systems are more sophisticated now and have learned from our mistakes, and therefore past bubbles will not be repeated.
This mindset was prevalent in the buildup of the subprime crisis where even sophisticated risk models developed by banks and rating agencies did not include a scenario where home prices decreased. This means that the “cream of the crop” of Wall Street were convinced housing prices would continue to increase endlessly.
An interesting fact about the book is how the Government lacks transparency in its own finances. The ironic fact is that the Government is always demanding transparency of corporations. However, the Government especially the Federal Reserve has trillions of dollars of liabilities with no accountability for.
Another interesting the authors point out is the history of the US Government defaulting on debt. Wait the US has never defaulted on its debt? According to the authors when the US changed its policy on the gold standard that was a de facto default. The authors argue that by making the dollar less valuable the Government was in effect defaulting on its debt. The authors use the same argument in regards to inflation.
The book might be a little dull at time due to the sheer amount of information the authors provides. However, anyone with an interest in economics will find this book is a gold mine of data. The authors conducted extensive research on financial crisis’s and document it in a coherent manner for the reader to understand. The book is an important publication in understanding previous financial crises and to apply those lessons to the current financial crisis.
Disclosure: New FTC guidelines require me to disclose I have a material connection because I received a free copy of the book to review.