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This Time Is Different: Eight Centuries of Financial Folly

by Carmen M Reinhart and Kenneth S Rogoff Princeton University Press
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Pbk 512 pages
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Throughout history, rich and poor countries alike have been lending, borrowing, crashing - and recovering - their way through an extraordinary range of financial crises. Each time, the experts have chimed, ''this time is different'' - claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters.

This book proves that premise wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes - from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much - or how little - we have learned.

Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.

An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.







PART I: Financial Crises: An Operational Primer 1

Chapter 1: Varieties of Crises and Their Dates 3

Crises Defined by Quantitative Thresholds: Inflation, Currency Crashes, and Debasement 4

Crises Defined by Events: Banking Crises and External and Domestic Default 8

Other Key Concepts 14

Chapter 2: Debt Intolerance: The Genesis of Serial Default 21

Debt Thresholds 21

Measuring Vulnerability 25

Clubs and Regions 27

Reflections on Debt Intolerance 29

Chapter 3: A Global Database on Financial Crises with a Long-Term View 34

Prices, Exchange Rates, Currency Debasement, and Real GDP 35

Government Finances and National Accounts 39

Public Debt and Its Composition 40

Global Variables 43

Country Coverage 43

PART II: Sovereign External Debt Crises 49

Chapter 4: A Digression on the Theoretical Underpinnings of Debt Crises 51

Sovereign Lending 54

Illiquidity versus Insolvency 59

Partial Default and Rescheduling 61

Odious Debt 63

Domestic Public Debt 64

Conclusions 67

Chapter 5: Cycles of Sovereign Default on External Debt 68

Recurring Patterns 68

Default and Banking Crises 73

Default and Inflation 75

Global Factors and Cycles of Global External Default 77

The Duration of Default Episodes 81

Chapter 6: External Default through History 86

The Early History of Serial Default: Emerging Europe, 1300-1799 86

Capital Inflows and Default: An "Old World" Story 89

External Sovereign Default after 1800: A Global Picture 89

PART III: The Forgotten History of Domestic Debt and Default 101

Chapter 7: The Stylized Facts of Domestic Debt and Default 103

Domestic and External Debt 103

Maturity, Rates of Return, and Currency Composition 105

Episodes of Domestic Default 110

Some Caveats Regarding Domestic Debt 111

Chapter 8: Domestic Debt: The Missing Link Explaining External Default and High Inflation 119

Understanding the Debt Intolerance Puzzle 119

Domestic Debt on the Eve and in the Aftermath of External Default 123

The Literature on Inflation and the "Inflation Tax" 124

Defining the Tax Base: Domestic Debt or the Monetary Base? 125

The "Temptation to Inflate" Revisited 127

Chapter 9: Domestic and External Default: Which Is Worse? Who Is Senior? 128

Real GDP in the Run-up to and the Aftermath of Debt Defaults 129

Inflation in the Run-up to and the Aftermath of Debt Defaults 129

The Incidence of Default on Debts Owed to External and Domestic Creditors 133

Summary and Discussion of Selected Issues 136

PART IV: Banking Crises, Inflation, and Currency Crashes 139

Chapter 10: Banking Crises 141

A Preamble on the Theory of Banking Crises 143

Banking Crises: An Equal-Opportunity Menace 147

Banking Crises, Capital Mobility, and Financial Liberalization 155

Capital Flow Bonanzas, Credit Cycles, and Asset Prices 157

Overcapacity Bubbles in the Financial Industry? 162

The Fiscal Legacy of Financial Crises Revisited 162

Living with the Wreckage: Some Observations 171

Chapter 11: Default through Debasement: An "Old World Favorite" 174

Chapter 12: Inflation and Modern Currency Crashes 180

An Early History of Inflation Crises 181

Modern Inflation Crises: Regional Comparisons 182

Currency Crashes 189

The Aftermath of High Inflation and Currency Collapses 191

Undoing Domestic Dollarization 193

PART V: The U.S. Subprime Meltdown and the Second Great Contraction 199

Chapter 13: The U.S. Subprime Crisis: An International and Historical Comparison 203

A Global Historical View of the Subprime Crisis and Its Aftermath 204

The This-Time-Is-Different Syndrome and the Run-up to the Subprime Crisis 208

Risks Posed by Sustained U.S. Borrowing from the Rest of the World: The Debate before the Crisis 208

The Episodes of Postwar Bank-Centered Financial Crisis 215

A Comparison of the Subprime Crisis with Past Crises in Advanced Economies 216

Summary 221

Chapter 14: The Aftermath of Financial Crises 223

Historical Episodes Revisited 225

The Downturn after a Crisis: Depth and Duration 226

The Fiscal Legacy of Crises 231

Sovereign Risk 232

Comparisons with Experiences from the First Great Contraction in the 1930s 233

Concluding Remarks 238

Chapter 15: The International Dimensions of the Subprime Crisis:

The Results of Contagion or Common Fundamentals? 240

Concepts of Contagion 241

Selected Earlier Episodes 241

Common Fundamentals and the Second Great Contraction 242

Are More Spillovers Under Way? 246

Chapter 16: Composite Measures of Financial Turmoil 248

Developing a Composite Index of Crises: The BCDI Index 249

Defining a Global Financial Crisis 260

The Sequencing of Crises: A Prototype 270

Summary 273

PART VI: What Have We Learned? 275

Chapter 17: Reflections on Early Warnings, Graduation, Policy Responses, and the Foibles of Human Nature 277

On Early Warnings of Crises 278

The Role of International Institutions 281

Graduation 283

Some Observations on Policy Responses 287

The Latest Version of the This-Time-Is-Different Syndrome 290


A.1. Macroeconomic Time Series 295

A.2. Public Debt 327

A.3. Dates of Banking Crises 344

A.4. Historical Summaries of Banking Crises 348





“This is quite simply the best empirical investigation of financial crises ever published. Covering hundreds of years and bringing together a dizzying array of data, Reinhart and Rogoff have made a truly heroic contribution to financial history. This single marvelous volume is worth a thousand mathematical models.” —Niall Ferguson, author of The Ascent of Money: A Financial History of the World

'Mr. Rogoff, a professor of economics at Harvard University, accurately predicted the eurozone debt crisis and for years has been telling anyone who would listen that China posed the next big threat to the global economy. He is starting to look right, again. . . . 'China is the classic 'This time is different' story,' Mr. Rogoff said.'--Andrew Ross Sorkin, New York Times

'[E]ssential reading . . . both for its originality and for the sobering patterns of financial behaviour it reveals.'--Economist

'Reinhart and Rogoff have compiled an impressive database, which covers eight centuries of government debt defaults from around the world. They have also collected statistics on inflation rates from every country where information is available and on banking crises and international capital flows over the past couple of centuries. This lengthy historical study gives what they call a 'panoramic view' of the unending cycle of boom and bust, showing how claims that 'this time is different' are invariably proven wrong. . . . This Time Is Different doesn't simply explain what went wrong in our most recent crisis. This book also provides a roadmap of how things are likely to pan out in the years to come. . . . This Time Is Different is an important addition to the literature of financial history.'--Edward Chancellor, Wall Street Journal

'Everyone working on economic policy should own This Time is Different and open it for a bracing blast of sobriety when things seem to be going well.'--Greg Ip, Washington Post

'[T]he most comprehensive study of financial crises and their aftermath.'--Eduardo Porter, New York Times

'The authors use copious amounts of data . . . to make the compelling case that any well-informed person should have seen the Great Recession coming. The essence of their book is that while financial crises come in different varieties, they are not mysteriously born of undersea earthquakes, but frequently occurring events that can be spotted and even controlled if politicians and regulators know what to look for.'--Devin Leonard, New York Times

'[A] terrific book.'--Andrew Ross Sorkin, New York Times

'This Time is Different takes a Sergeant Friday, just-the-facts-ma'am approach: before we start theorizing, let's take a hard look at what history tells us. One side benefit of this approach is that the current book manages to be both extremely useful to professional economists and accessible to the intelligent lay reader. The Reinhart-Rogoff approach has already paid off handsomely in making sense of current events.'--Robin Wells and Paul Krugman, New York Review of Books

'Among policy experts and economists, This Time is Different: Eight Centuries of Financial Folly . . . has become so influential that when somebody says, 'We live in a Reinhart-Rogoff world,' everybody else in the room nods sagely.'--Justin Lahart, Wall Street Journal

'Professor Rogoff and his longtime collaborator Carmen Reinhart . . . know more about the history of financial crises than anyone alive. The pair have just published their broad survey of financial crises, This Time is Different. In an era when most 'analysts' rely on maybe 30 or 40 years' worth of financial history--and then only that of the U.S.--the authors' knowledge of financial crises and government bond defaults going back to the Spanish empire and before offers a richer perspective.'--Brett Arends, Wall Street Journal

'[O]ne of the most important economic books of 2009.'--Jon Hilsenrath, Wall Street Journal

'[T]he definitive book on financial crises.'--Steven Pearlstein, Washington Post

'Two top-notch economists provide a clear and interesting explanation of why economic crises keep occurring. Broadly speaking, downturns such as the one we are recovering from are historically associated with characteristics that should sound quite familiar to today's investors.'--David Schwartz, Financial Times

'[A] masterpiece.'--Martin Wolf, Financial Times

'The four most dangerous words in finance are 'this time is different.' Thanks to this masterpiece by Carmen Reinhart at the University of Maryland and Kenneth Rogoff of Harvard, no one can doubt this again. . . . The authors have put an immense amount of work into collecting the data financial institutions needed if they were to have any chance of making quantitative risk management work.'--Martin Wolf, Financial Times

'Here's a deep and rewarding assignment for all of you, young and old, poor and rich, bullish and bearish. Retire to a quiet spot with a copy of This Time Is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth Rogoff.'--Bob Lenzner,

'[A] fine new history of financial debacles.'--Daniel Gross, Newsweek

'Wouldn't it be nice to have $1,000 for every time a pundit proclaims an era of endless prosperity, consigning booms and busts to the dumpster of history? The next time you hear that canard (and you will) pour yourself a single malt and dip into Carmen M. Reinhart and Kenneth S. Rogoff's landmark study, This Time Is Different. Wherever you open the book, you'll find proof that debt-fueled expansions have ended in financial ruin for hundreds of years. . . . The result is a visual history laid out in beguilingly simple graphs and tables, making the book both definitive--a must read for professors and investors--and accessible to a wider audience.'--James Pressley, Bloomberg News

'Carmen Reinhart and Kenneth Rogoff have delivered a powerful and eloquent statement. . . . Reinhart and Rogoff have done an extraordinary job in putting together statistics on government debt--a task that economic historians should have done long ago but shied away from because of the difficulties of defining 'government', which is often complex and multi-layered.'--Harold James, The American Interest

'Unlike prior narrative accounts of market panics from such finance writers as Charles Kindleberger and Edward Chancellor, Reinhart and Rogoff give us a data-driven study that is global in sweep but also a model of clarity. The authors package their notably nonhysterical analysis of the latest crisis in a large, self-contained section of the book inviting harried readers to skip right ahead to it.'--Daniel Akst,

'A tour de force of quantitative analysis covering financial crises affecting 66 countries over the past 800 years, the book identifies pre-crisis patterns that recur with eerie consistency. This Time is Different is a must-read for anyone on the lookout for canaries in coal mines.'--Barron's

'This is certainly one of the must-read books of the year.'--Arnold Kling,

'Rogoff and Reinhart . . . provide an eye-opening look at the cycles of boom and bust and how governments deal with those cycles.'--Arkansas Business

'[A] valuable new book.'--Idaho Statesman

'Having studied mountains of economic data during the past eight centuries, the authors insightfully point out the highly repetitive nature of financial crises resulted from a dangerous mix of hubris, euphoria and amnesia.'--Shanghai Daily

'This Time is Different . . . is an unusually powerful bull detector designed to protect investors and taxpayers alike--eventually, at least, and provided the spirit is willing. . . . The book's most memorable passages--what the authors call its 'core life'--are to be found not in colorful stories about long-ago personalities, but rather in its various tables and figures. They take some time to comprehend, but any responsible citizen can and ought to consider they evidence they present. It is overwhelming.'--David Warsh, Harvard Magazine

'Financial folly, economists Carmen Reinhart and Kenneth Rogoff show in this groundbreaking book, knows no boundaries and has no expiration date. . . . For a book built around numbers, This Time is Different makes for surprisingly good reading. The authors are well aware that human nature is at the heart of the disasters they document, and they enliven the text with brief and amusing accounts of charlatans and cheats.'--Paul Wiseman, USA Today

'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 Time is Different] 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.'--Andrew Gamble, New Statesman

'[T]his is the kind of economics we desperately need, as it is relevant, fact-based and replete with wisdom from the past--and lessons for the future.'--Irish Times

'For those who want to relearn the forgotten lessons of the past, This Time is Different, by economics professors Carmen Reinhart and Kenneth Rogoff, is an excellent place to start. . . . These are lessons worth learning.'--Liaquat Ahamed, National Interest

'This book's distinctive strength is that it's built around a massive international database going back as far as twelfth-century China and medieval Europe.'--Harvard Business Review

'[S]uperb.'--Neil Reynolds, Globe & Mail

'Reinhart and Rogoff have compiled an encyclopedic analysis of the history of financial crises over the last 750 years. But their volume is not merely of historical interest. Rather, it has great relevance for anyone interested in understanding how the current financial crisis is likely to unfold.'--Choice

'Reinhart and Rogoff present a sobering reminder that financial crises are a serial phenomenon--caused in no small part by the seductive 'this-time-is-different syndrome,' the prevalent belief that to us, here and now, old economic laws of motion no longer apply. Their ambitious quantitative history of financial crises draws out sweeping parallels between financial crises, across times and continents; and between inflating away domestic debt, currency debasements, and defaults on external debt.'--Finance & Development

'[I]nstant classic tome on debt crises.'--Alen Mattich, Dow Jones Newswires

'[A]wesome.'--William Easterly, AidWatch

'One book in particular has been circulating among economists and market insiders. This Time is Different analyzes vast amounts of historical data on financial debacles, including state failures around the world, bank crises, currency woes and high inflation. The title satirizes those who fail to learn from past blunders and repeat them while insisting, 'This time is different.''--Hideo Tsuchiya, Nikkei Weekly

'Reinhart and Rogoff have produced a splendid book detailing the massive self-destructive behavior that all states have been undergoing over the past several centuries. . . . Reading this excellent book on the paths of previous economic cycles could help avoid some of the worst results of our self-destructive financial acts.'--Lloyd Demause, Journal of Psychohistory

'Anyone looking for a more academic take on where this meltdown places in the history of financial folly should turn to This Time is Different, a magisterial work on the causes and consequences of crises stretching back 800 years.'--Matthew Valencia,

'I couldn't put it down until I had gone all the way through it, and then I immediately ordered it as an assigned text for my Spring 2010 MBA course, 'The Development of Financial Institutions and Markets.' My students are finding it useful and engaging.'--Richard Sylla, EH.Net

'Easily the most useful, and arguably the best, is this splendid piece of research and analysis on, as the subtitle says, 800 years' worth of booms and busts.'--Bill Emmott, Survival

'This Time Is Different changes the way we can study financial crises. It is the start of a truly comprehensive approach to the subject. . . . It adds new ideas that will be useful for gauging the risk of future crises and perhaps even reducing their impact, if investors and policymakers are willing to learn from other people's mistakes, not just their own mistakes.'--Kurt Schuler, CATO Journal

'[T]he book will be essential reading for anyone who wants to put the recent crisis into some historical perspective--and get some ideas on how to prevent, or at least delay, the next one.'--David Orrell, Foresight

'It's the only book I have seen that provides, with great detail and over 800 years, clearly defined, analytical, data-driven evidence of what the impact of a post-financial crisis period is and hence what we can anticipate. . . . I've never seen anything that comes close in terms of being comprehensive. It's a tour de force.'--Dambisa Moyo, The Browser

'[T]his Time is Different [is a] landmark work on financial crises.'--Megan McArdle,

'Readable, shocking, and vital, this is a book that every investor who has been tempted by a hefty interest rate in a faraway land should study.'--Andrew Allentuck, National Post

'[This Time is Different] is perhaps the finest study of financial crises ever published.'--Ezra Klein, Washington Post

'[A] modern classic. . . . In their landmark study of hundreds of financial crises in 66 countries over 800 years, Reinhart and Rogoff find oft-repeated patterns that ought to alert economists when trouble is on the way. One thing stops them waking up in time: their perpetual belief that 'this time is different.''--Ross Gittins, Sydney Morning Herald

'[S]eminal.'--Rana Faroohar and Bill Saporito, Time

'[T]he pre-eminent history of financial crises.'--Adam Davidson, New York Times Magazine

'The book by Reinhart and Rogoff is one for the ages, and it will be remembered as a landmark event, not least given the coincidence of its publication of such a deep and broad historical analysis of economic crises with the very moment when the world was entering a massive 'hundred year flood' type of calamity. The authors' empirical work is encyclopedic and much of the data are highly original and the result of intense effort. The necessary theoretical framing is provided, but in terms that all target readers should be able to absorb. The overall view is panoramic and the message carried is an important one for all to hear--policymakers, commentators, and researchers. Crises are still with us, they are very painful indeed, and perhaps it will always be so. It is up to us to figure out why and how crises happen, and to figure out what, if anything, can and should be done to mitigate their devastating effects in future. This book is therefore, above all, a call to action.'--Journal of Economic Literature

'[E]conomists Carmen Reinhart and Kenneth Rogoff take a much-needed longer view, placing the current crisis, with a focus on the U.S. Housing bubble, into historical perspective.'--Anil Hira, Perspectives on Politics

'Reinhart and Rogoff's book belongs to the tradition of studies that appear in the middle of a crisis but it manages to keep its spine above water because of its historical depth and systematic rigour.'--Sakis Gekas, Dublin Review of Books

Carmen M. Reinhart is professor of economics at the University of Maryland. She recently coedited The First Global Financial Crisis of the 21st Century and is a regular lecturer at the International Monetary Fund and the World Bank.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University. He is the coauthor of Foundations of International Macroeconomics, and a frequent commentator for NPR, the Wall Street Journal, and the Financial Times.