Tag Archives: This Time is Different: Eight Centuries of Financial Folly

The Laws of Physics, and of Finance, Do Not Skip Right Over Us – “This Time is Different,” Not!

Vinny Gambini: So, Mr. Tipton, how could it take you 5 minutes to cook your grits when it takes the entire grit eating world 20 minutes?
Mr. Tipton: I don’t know, I’m a fast cook I guess.
Vinny Gambini: I’m sorry I was all the way over here I couldn’t hear you did you say you were a fast cook, that’s it?
Mr. Tipton: Yeah
Vinny Gambini: Are we to believe that boiling water soaks into a grit faster in your kitchen than anywhere else on the face of the earth?
Mr. Tipton: I don’t know.
Vinny Gambini: Well, I guess the laws of physics cease to exist on top of your stove. Were these magic grits? Did you buy them from the same guy who sold Jack his beanstalk beans?
(dialogue confirmed from the Memorable Quotes for My Cousin Vinny page on imdb)

———–

The laws of physics do not cease to exist on any one particular stove in the deep south.  And the lessons of history, of financial reality, can not be thrown out just because we “feel like” this time and our situation is different.

I read quite a few books.  One that I have blogged about a few times (here, here, and here) is this book: This Time is Different:  Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff (Princeton University Press.  2009).  It’s one of those “important books.”  People quote from it, write about it, and try to pay attention to it.  I presented my synopsis of this book for a client to a group as part of a serious discussion of financial issues.  It was a great session!

Here are a couple of brief excerpts:

Our basic message is simple:  We have been here before.
and
We hope that the weight of evidence in this book will give future policy makers and investors a bit more pause before next they declare, “This time is different.”  It almost never is.

The premise of the book is simple.  When people think “this time is like no other in history,” and thus we think that our solutions have to be different than those of other times, the authors have a simple piece of advice – “not so fast!”

Well, there is a column in today’s Washington Post, The anti-business president’s pro-business recovery by Ezra Klein, that reminds us that we are not all that different, and this time is not all that different.  Here are some excerpts from the column:

Not all recessions are created equal. Recessions caused by financial crises take a lot longer to dig out of than their more common cousins. One is like the flu. The other, a car crash. When the flu goes away, you’re good. When a collision spins to a stop, that’s when the long, slow process of healing begins.

In “This Time is Different: Eight Centuries of Financial Folly,” Carmen Reinhart and Kenneth Rogoff study every financial crisis of the past 800 years. It’s an exhaustive study, and its conclusions are depressing for a country that believes itself exceptional even in its suffering: We’re not special. (emphasis added).

If you consider unemployment, housing prices, government debt and the stock market, Rogoff says, “the U.S. is just driving down the tracks of a typical post-WWII deep financial crisis.” In some areas, we’re even a bit ahead of the game: Economic output usually falls by 9 percent. We held the drop to 4 percent.

Even the unevenness of our recovery is predictable. “Housing and employment come back much slower than equity and gross domestic product,” Reinhart says. GDP usually falls for two years and then recovers. Equity can move even faster, which helps explain corporate America’s rapid revival. But employment tends to fall for five years. And housing? That’s usually a six-year slide.

So business may be back, but customers aren’t.

We do feel flummoxed, more than a little uncertain, even a sense of panic at the moment.  But this time really is not different – “It almost never is.” And surely, in the midst of the angst and uncertainty that we feel today, it is valuable to be able to look at the accumulated wisdom and lessons of the ages, and the careful research and analysis of genuine scholars who have spent the hours (and weeks and months and years) of their days trying to understand these lessons.

This book is, in my opinion, definitely worth another look.

This Time Is Different – NO, it’s Not! (insight from Reinhart & Rogoff)

This blog is about business books, about ideas found in business books, about thoughts prompted by business books…  we are interested in people finding paths to success, and avoiding paths to great mistakes, and on this blog we share what we read, what we think, what we find…  Sometimes we simply quote the words and insights of others, and at other times, we throw in our reflections and thoughts.

A few months ago, I prepared a synopsis of a true tome (you know, one of those big thick books that takes a lot of work to dig through and understand).  It is this book:

This Time is Different:  Eight Centuries of Financial Folly (Princeton University Press; 2009) by Carmen M. Reinhart & Kenneth S. Rogoff.  It is a book filled with charts and data from eight centuries of financial folly.

Here’s a short quote from the preface:

Our basic message is simple:  We have been here before.

They wrote:

The global financial crisis of the late 2000’s, whether measured by the depth, breadth, and (potential) duration of the accompanying recession or by its profound effect on asset markets, stands as the most serious global financial crisis since the Great Depression.  The crisis has been a transformative moment in global economic history whose ultimate resolution will likely reshape politics and economics for at least a generation.
Should the crisis have come as a surprise?…

And the answer is – “no.”  It should not have been a surprise.  And the premise of the book is that, no, this time is not different, in spite of the fact that many have argued that this was a unique problem in human economic history.  Again, from the book:

This time may seem different, but all too often a deeper look shows it is not.  Encouragingly, history does point to warning signs that policy makers can look at to asses risk – if only they do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, “This time is different.”

(Mary F. Calvert for The New York Times) Kenneth Rogoff and Carmen Reinhart at Ms. Reinhart’s Washington home. They started their book around 2003, years before the economy began to crumble.

The New York Times published a major multi-page piece about the work and collaboration of these two authors:  They Did Their Homework (800 Years of It) by Catherine Rampell.  The article/profile is definitely worth reading.  Here are quite a few excerpts.

“The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.”

“There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.”

“I have a talent for rounding up data like cattle, all over the plain,” she says.

“You know, everything is simple when it’s clearly explained,” she contends. “It’s like with Sherlock Holmes. He goes through this incredible deductive process from Point A to Point B, and by the time he explains everything, it makes so much sense that it sounds obvious and simple. It doesn’t sound clever anymore.”

But, she says, “economists love being clever.”

Perhaps because “This Time Is Different” is empirical rather than proscriptive, it has defied categorization.

MICROECONOMICS — the field that focuses on smaller units like households and workers, as opposed to big-picture questions about how national economies function — has embraced real-world data-mining. (Think “Freakonomics.”)

Macroeconomics has been slower to change, but the popular success of “This Time Is Different” and related work seems to be changing how macro practitioners approach their craft.

It has also changed how policy makers think about their own mission.

Mr. Rogoff says a senior official in the Japanese finance ministry was offended at the suggestion in “This Time Is Different” that Japan had once defaulted on its debt and sent him an angry letter demanding a retraction.

Mr. Rogoff sent him a 1942 front-page article in The Times documenting the forgotten default. “Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.”

I think this is a book worth putting on your reading stack.  The breadth of their research is genuinely impressive.

Clusters of Crises – Interlocking Solutions

Last night, I presented my synopsis of This Time is Different:  Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff.  I presented this at a gathering hosted by a financial planning team, and a member of that team took the floor following my presentation for his observations and Q & A.  Here is the quote from the book that he said deserved special attention:

Crises often occur in clusters.

His point was clear:  there is not one problem in the financial world, but a group, a cluster of problems.  The subprime mortgage crisis, the banking crisis, the Wall Street crisis, the international debt crisis, they are all different – they are all interlocking…

It reminded me again of an important principle I first learned from Scott Peck’s book, In Search of Stones.  The idea is found in the word “overdetermined.”  And the word means this:  there is no one cause for a problem, and there is no one solution to the problem(s).  Here’s an excerpt from the book:

I want to scream this from the rooftops:  “All symptoms are overdetermined.”  Except that I want to expand it way beyond psychiatry.  I want to expand it to almost everything.  I want to translate it, “Anything of any significance is overdetermined.  Everything worth thinking about has more than one cause.”  Repeat after me:  “For any single thing of importance, there are multiple reasons.”  Again, “For any single thing of importance, there are multiple reasons.”

So, there is no one problem:  Crises often occur in clusters.

And there is no one solution.  In The Working Poor:  (Invisible in America) David K. Shipler speaks strongly to this.  He states that the problems of the working poor are many, and the solutions must also be many, varied, interlocking.  Here are some quotes:

For practically every family, the ingredients of poverty are part financial and part psychological, part personal and part societal, part past and part present.  Every problem magnifies the impact of the others, and all are so tightly interlocked that one reversal can produce a chain reaction with results far distant from the original cause.

If problems are interlocking, then so must solutions be.  A job alone is not enough.  Medical insurance alone is not enough.  Good housing alone is not enough.  Reliable transportation, careful family budgeting, effective parenting, effective schooling are not enough when each is achieved in isolation from the rest.  There is no single variable that can be altered to help working people move away from the edge of poverty.  Only where the full array of factors is attacked can America fulfill its promise.

And here’s my summary paragraph of the book:

The working poor are poor because of an interlocking array of reasons.  Any approach to solutions has to grasp the complexity of the problem(s), and provide a multi-faceted strategy to pursue solutions, all at once – continually.

This blog is about:  business books, business book authors, business ideas…  Actually, it is a blog about problems, and solutions.  And there will be many who read this blog looking for clarification on the problem(s), and looking for the (one) answer.  I’ve got bad news.  There is no one problem.  And there is no one solution.   There are problems. There are solutions.  And it is/they are all interlocking, overdetermined.

That’s why there is always another thought to blog about.  And that’s why we have a blogging team.  Because we will never arrive at “having fully learned.” We simply keep learning.

We Think “This Time is Different” — it almost never is (wisdom and warning from Reinhart & Rogoff)

Way back in my graduate school days, I was reading article after article in serious academic journals.  I had great trouble understanding what I was reading.  (Yes, some of my critics would say the same now).  It was the first semester, actually the first couple of weeks, in a brand new discipline.  I had gone from Theology to Rhetoric, and I felt lost.  So I went to see one of my professors, and said – “I’m not getting it.  Any of it.”  Thankfully, he had heard it before, and told me that that was absolutely the common experience.  He said something along these lines:  “Keep reading, and it will just begin to all make sense.”  He was right.  I did, and it did.

I remembered those days, and those feelings, while reading: This Time is Different:  Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff.  I feel a little lost.  It is written by serious economists, and though they are really trying to make it accessible to the non-economists among us, it is filled with charts and graphs and vocabulary that all stand outside my normal reading experience.  But I have the distinct impression that this is an important book.  The premise is clear from the title, “This Time is Different.” They are speaking of the great recent/current economic crisis/meltdown, which they label as “the Second Great Contraction.”  And the meaning is this:  “No, it’s not – this time is not different!”  Here’s a key quote:

This time may seem different, but all too often a deeper look shows it is not.  Encouragingly, history does point to warning signs that policy makers can look at to asses risk – if only they do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, “This time is different.”

In other words, “we” (we = the economists, the decision makers of this era) think that we have put into place wiser and more workable and safer regulations, that we have better understandings, that we have understood the dangers and found better ways to avoid risks, so that we are now in a better position to handle the really big financial challenges.  We are wrong.  “This time is different” thinking is a recipe for disaster.  Again from the book:

The most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that “this time is different.”  It isn’t different this time – it almost never is!

So, here is my current summary of the lessons from the book, which I think are accurately discerned from the book itself (but remember, I’m an outsider to this discipline):

1)  We think we are smarter, wiser, more on top of things, than those who made mistakes in the past.  We are just kidding ourselves.

2)  What got them will get us, and the people who come after us.  When will we ever learn?

3)  When the problem is a banking crisis (and this one largely was), there is no nation immune from the dangers and the consequences for the crisis – neither wealthy nations or poor nations…  and because it hit the United States, it went world-wide…

4)  The problem is systemic, and requires major (government) action to survive the crisis – but that very government action carries its own dangers…