This Time is Different: Eight Centuries of Financial Folly.

• Author: Schuler, Kurt
• Position: Book review

This Time Is Different: Eight Centuries of Financial Folly

Carmen M. Reinhart and Kenneth S. Rogoff

Princeton, N.J.: Princeton University Press, 2009, 463 pp.

Carmen Reinhart and Kenneth Rogoff's wide-ranging, quantitative study of financial crises is a landmark work. Reinhart and Rogoff have taken advantage of the advances of the last 20 years in economic history, personal computers, and the Internet to assemble a large data set covering most countries of any importance for the world economy. They are the first researchers to base their generalizations about financial crises on data that combine geographic breadth with great historical depth.

The "this time is different syndrome" is the mistaken belief that financial crises happen to other people at other times and places, but not to us here and now, because we are doing things better, we are smarter, and we have learned from past mistakes, so old rules of valuation no longer apply. The book has six parts: a description of the definitions and sources underlying the analysis; sovereign external debt crises; domestic debt crises; banking crises, inflation, and currency crashes; the recent U.S. subprime mortgage crisis and its worldwide consequences; and a summary of what we have learned. There are also nearly 100 pages of data appendixes, including historical summaries of banking crises.

Those of us who live in rich countries think of defaults on sovereign external debt as a malady characteristic of poorer countries, but that is not the case. The United States restructured its debt in 1790 in a partial de facto default, while France defaulted eight times from 1558 to 1788. Yet both then "graduated," avoiding default thereafter and having their bonds recognized by investors as low in risk. Why some countries graduate and others do not is a puzzle for future researchers to piece together.

As well as defaulting on external debt, many governments have defaulted on their domestic debt. Reinhart and Rogoff's work here is the most novel part of the book, because before their efforts, long-term international data on domestic debt were severely lacking. Especially valuable is their analysis of debt and inflation. Many inflations have been so high as to drive people away from using local currency, thereby reducing government revenue from the "inflation tax." The deeper logic underlying this seemingly illogical behavior is that high inflation can greatly reduce the real value of domestic debt.

Although...