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Author: rclosch Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 455520  
Subject: “This Time it is Different” Date: 10/4/2012 12:03 PM
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This excellent book written by two professors from Harvard Carmen M. Reinhart and Kenneth S. Rogoff while not exactly a beach read is an important book for anyone that seeks an understanding of economic history. The title of the book is based the fact that investors, businessmen and bankers in the midst of an economic expansion assume that the expansion will continue indefinitely. But in the real world, as economist Hyman Minsky pointed out “stability is unstable”. Long periods of prosperity feed hubris and greed, and encourage excessive risk taking. In a free market environment each period of economic expansion carries with it the seeds of its own destruction.

The “This Time it is Different” published 2009 contains a huge database of 800 years of country defaults, banking crisis, and currency debasements. Much of material is new, having been complied and consolidated by the authors from statistics collected all over the world. The point is, of course, that this time it is never different. This may not be particularly profound conclusion, but the statistical evidence presented by the authors is none the less quite surprising both in terms of the number of the events chronicled, and the shape of the patterns that develop from these data. Rather than being black swans (uncommon and unpredictable events) they are the evitable result of economic cycles in a free market economy. While timing of a banking crisis may be hard to predict they are never the less unavoidable. While I am not opposed to regulation many attempts to regulate are doomed from the start. The notion that we can eliminate market cycles is born of the same sort of hubris that says “this time is different”, and more likely to make things worse than it is to prevent disaster.

One amazing statistical table shows that for the 66 countries covered for the period from 1800 to 2008 there were 268 banking crises. None of these events caused the sky to fall or brought an end to capitalism. Instead throughout this period the world economy survived and living standards increased. Granted the rate of GDP increase varied substantially from country to country. Significantly the rate growth of personal income and per capita GDP was substantially greater in the countries with the most banking crises. The number of crises in a particular country is indicative the length of time the country operated with free markets.


If we break the numbers down by region African countries averaged 1.7 crises per country, Asia 3.7 per country, Europe 5.8 per country (7.4 per country if you ignore Russia, Romania, Poland, Hungry and Turkey), Latin America 2.9 per country, and North American wins with an average of 10.5 per country.


The top ten countries in the world in the number of banking crises during this 208 year period were;

1. France 15
2. United States 13
3. United Kingdom 12
4. Brazil 11
5. Italy 11
6. Belgium 10
7. China 10
8. Denmark 10
9. Canada 8
10. Germany 8
11. Spain 8

Clearly there is a strong relationship between free markets and the number of banking crises, but if we admit this relationship then are we not faced with the conclusion that the price of reducing these crises would be much slower grown in GDP per capita and living standards. It seems that one of the central ironies of life economic pain promotes growth. The authors do not mention this relationship Hey they are from Harvard, and in league with bureaucrats everywhere who are always looking for people to blame and ways to solve a problem (Hubris).

The United States has survived 13 banking crises since 1800 and not only survived but prospered, while Russia, Kenya, Angola, Hungry have had two, Romania, Angola, Algeria, and Zimbabwe, one. It is time to look at the business cycle as a natural function of a market economy. While we may not like the pain of the consolidation it is creative destruction looking for a ways to make the economy work better, and accept the fact that there is really nothing we can to eliminate the pain. Just as long periods of prosperity inevitably lead bankers and investors to take on stupid risk, it is what we learn from the pain of the consolidation that propels the next period of prosperity

Will it be different this time? Will these crises be the end of our prosperity? Have we reached the end of our period of dramatic growth? Is the American empire as dead as the as the British Empire or maybe turned into Japan? Or will this time follow the same pattern as our previous 208 years and this great contraction be followed by a couple of decades of double digit growth in corporate earnings and PE ratio expansion?
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