"This time is different." When the hedge fund Long Term Capital Management collapsed in 1998, an experienced trader made the remark: "More money has been lost because of four words than at the point of a gun."
In their book This Time Is Different , Carmen Reinhart and former IMF economist Kenneth Rogoff analyze eight centuries of financial crises, and find that the patterns are always the same. This is not the first time, for example, that Greece has been in trouble. Greece defaulted in 1826 and, as a result, was shut out of the global capital markets for 53 years. Indeed, there were at least 250 sovereign external default episodes between 1800 and 2009, including China (1921), Egypt and Turkey (1860s and 1870s). And Spain, which faces insolvency now, is returning to form. It managed to default seven times in the nineteenth century and six times in the preceding three centuries. England defaulted back in 1340 following a series of military failures by Edward III, sending several banks in Florence broke. The French kings used to execute their creditors which I think would have to be the most extreme form of debt restructuring. Along with serial default, is the tendency to lapse into high and extremely high inflation. Angola's inflation rate of 4000% in 1996 and Zimbabwe's rate of 66,000% by 2007 seem to echo the currency debasement that goes back to the times of ancient Greece when Dionysius of Syracuse collected all the coins in his realm, stamped each one drachma coin with a two-drachma mark and used the proceeds to pay off his debt. While there is no data from that period, the swindle would have sent prices soaring.
The interesting point here is that no economist picked up these patterns. During the debt crisis of the 80s, for example, the thinking at the time was that there could be no problem because commodity prices were strong, interest rates low and plenty of oil money was being recycled. With the debt crisis in Asia in the 1990s, the view was that there could be no problem because the region had strong growth and savings, conservative fiscal policies and stable exchange rates. With the debt crisis of the 1990s and early 2000s in Latin America, the argument was that things were safe because the debts were bond debts, not bank debts. And in the lead up to the subprime crisis, everything was fine because of globalisation, the technology boom, a superior financial system and financial instruments that controlled risk and securitized debt. And as for Greece defaulting, there was no problem because Greece was part of Europe and sharing a currency with its affluent neighbours. So in each of these cases, everything was different. Except that it wasn't.
The writers make the point that incidence of banking crises proves to be remarkably similar in both high and middle-to-low income countries. The world's financial centres – Britain, the United States and France – stand out with 12, 13 and 15 episodes of banking crises respectively. These crises lead to a sharp decline in tax revenues, government debt rising by 86% and financial consequences that go well beyond bailout costs. In the aftermath, housing prices tend to fall 35% over six years and unemployment soars.
The latest crisis bears a striking resemblance to the 1920s with its relentless global optimism, not dissimilar to the five year boom that preceded the worldwide financial crisis. Part of the dynamic in the 2000s was global peace, similar to the widely held view in the 1920s that World War One would not be repeated.
Still, there was significant financial reform following the crisis of the 1930s. So far, the Obama administration has not completely fixed Wall Street. In that case, things are actually different this time around. Because of that, there will be worse crises in the years to come.
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