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    The Second Great Contraction: From This Time Is Different
    The Second Great Contraction: From This Time Is Different
    The Second Great Contraction: From This Time Is Different
    Ebook113 pages1 hour

    The Second Great Contraction: From This Time Is Different

    By Carmen M. Reinhart and Kenneth S. Rogoff

    3.5/5

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    About this ebook

    We've been assured that the recession is over, but the country and the economy continue to feel the effects of the 2008 financial crisis, and people are still searching for answers about what caused it, what it has wrought, and how we can recover. This selection from the best-selling book This Time Is Different—the definitive history of financial crises, including the recent subprime meltdown—answers these questions and more.

    Princeton Shorts are brief selections excerpted from influential Princeton University Press publications produced exclusively in eBook format. They are selected with the firm belief that while the original work remains an important and enduring product, sometimes we can all benefit from a quick take on a topic worthy of a longer book.

    In a world where every second counts, how better to stay up-to speed on current events and digest the kernels of wisdom found in the great works of the past? Princeton Shorts enables you to be an instant expert in a world where information is everywhere but quality is at a premium. The Second Great Contraction does just that.

    LanguageEnglish
    PublisherPrinceton University Press
    Release dateJul 18, 2011
    ISBN9781400841127
    The Second Great Contraction: From This Time Is Different

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    Reviews for The Second Great Contraction

    3.5/5

    114 ratings8 reviews

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    • 2/5
      A decent reference, but a lousy read.
    • 5/5
      This book is a joy if you're the kind of person who likes good statistics and qualitative reasoning. One hundred pages of appendices alone! It's almost beautiful.

      A painstaking analysis of statistics of financial crises throughout history. Some are from the 13th century, yes, but the bulk of the data is from the 19th century onwards. What do they learn?

      1) Debt accumulation brings risk.
      2) Severe financial crises have one of the following: Decline in housing prices, unemployment rises, output falls, government debt rises even higher.
      3) Not all economic predictions are created equal.
      4) Developed nations might be able to avoid and graduate from external debt defaults, but all are still at risk from bank defaults.

      There is certainly more. These are some of the most salient points. I won't say more because 1) the arguments are complicated and 2) I want you to take a look at this. Seriously.

      As for our current crisis? Well, there simply has been little comparison for a global crisis so far. Exports might not be as big an aid for growth as seen before. We are lucky that this is only the worst crisis since the Great Depression.

      A necessary book. Hard mathematical truths. I quote: "We hope that the weight of evidence in this book will give policy makers and investors a bit more pause before they declare, 'This time is different'. It almost never is."
    • 4/5
      "This time is different" offers the data necessary to point out, sorry, you're not so special. I love the books many data tables that include countless stories untold, which is also the book's main weakness. Its great collection and presentation of empiric crisis data makes the missing data on the surrounding political economy all too conspicuous. After all, the sovereign and internal debt crises and banking crises are the result of economic and political mismanagement. Reinhart and Rogoff are in the business of body counting at the scene of the crime. The perpetrators are left out of the picture. Hopefully, somebody will add them soon, although, like unhappy families, it will be difficult to assign them to simple categories. War is certainly one activity that seldom pays and often triggers crises.One puzzle of the book seems to be the lenders' willingness to finance serial defaulters such as Greece. A hard-nosed look at the Greek track record should have discouraged even the most eager banker. In one of The Economist's Xmas issues was a great article about the Russians serially fleecing Western creditors through the centuries. The magic of "This time is different" is unbreakable. One wonders why the continuous currency debasement of most kings (actually an indirect form of taxation) didn't trigger offsetting waves of inflation. How can Reinhart/Rogoff's longterm view be blended into short-term thinking?With two years hindsight, the text offers a good standard overview of sovereign and internal debt crises as well as banking crises. Recommended.
    • 4/5
      Not the ideal book for the electronic format as the numerous tables are hard to read. The content, however, is very good
    • 5/5
      Warning! This is an academic work, not a novel, and is not suitable for casual reading. It is a rigorous, exhaustively documented and very thorough look at the history of financial crisis in world history. In so doing, it compares the warning flags and false economic policy that has perpetuated macroeconomic theory and practice for world countries over past centuries and looks at common trigger events leading to historical meltdowns.The title is a facetious play on words that has led, predictably, to the current economic woes for the U.S. and world markets and economic bases. It takes into account debt, tax revenue and liberal economic policies in the banking industry that have failed to stem the tide. There are hundreds of references to world level economic studies, and anyone who wants to learn what and who pushed us into the present economic state must read this book.
    • 4/5
      This book has been widely praised for its quantitative analysis of financial crises going back 100 years or more, which it uses to put our own current (and very serious) crisis into perspective. It is written for readers with a general knowledge of economics, and the authors suggest those primarily interested in the current crisis start reading at Chapter 13. The first twelve chapters describe and explain the authors' model and seemed designed primarily defend their work within the academy. They will certainly interest economic historians, who in the past have relied on less quantitative analyses such as Charles Kindleberger's classic “Manias, Panics, and Crashes.” Overall, it's an excellent study, and deserves a much wider readership than it will receive.Being good academic economists (rather than policy pundits), the authors are careful in their conclusions, but they take a strong stand on a few issues. One, of course, is that the siren song of “this time is different” always leads to fatal outcomes. They demonstrate that such arguments, whether justifications for huge, destabilizing inflows of foreign investment (which inevitably reverse course at some point) or confident claims that burgeoning debt balances are based on new valuations for risk and investment (and thus are safer than in the past), invariably prove to be wishful thinking. They offer no solutions for this problem; in fact, they are quite pessimistic that such behavior can be changed. As they put it: “The fading memories of borrowers and lenders, policy makers and academics, and the public at large do not seem to improve over time, so the policy lessons on how to 'avoid' the next blow-up are at best limited.” They suggest some useful warning indicators, but doubt they will prevent future crises.A second conclusion takes aim at the “belief in the invincibility of modern monetary institutions,” in particular central banks' obsession in the past few decades with inflation targeting. They are not suggesting that keeping inflation low is a bad thing, but rather that central banks came to view it as an end in itself, a solution to the volatility of the business cycle. What this has meant in practice they illustrate with their description of the “Greenspan put.” That is, “the (empirically well-founded) belief that the U.S. central bank would resist raising interest rates in response to a sharp upward spike in asset prices (and therefore not undo them) but would react vigorously to any sharp fall in asset prices by cutting interest rates to prop them up.” This, the authors conclude, led markets to believe (accurately, as it turned out), that the Fed would do nothing to spoil the party in financial markets, and would bail out the party-goers if things went to hell. They reasonably conclude that “in hindsight, it is now clear that a single-minded focus on inflation can be justified only in an environment in which other regulators are able to ensure that leverage (borrowing) does not become excessive.” Which is another way of saying that inflation-targeting policies become increasingly dangerous as corporate-sponsored deregulation (such as we've witnessed steadily since the 1980s) weakens government supervision.
    • 3/5
      Shorter version: No, it’s not. This data-stuffed book is for people who know/care a lot about macroeconomics. I’m not sure it’s the best for general audiences (e.g., me), but they have looked at a lot of different data sources. The book connects external sovereign debt to internal debt (what the government owes its citizens, including sometimes what it extracts from them by regulating what interest they can earn in banks) and argues that internal debt plays a bigger role in debt crises than has been acknowledged. They also argue that the run-up in sovereign debt that occurs in financial crises owes more to decreased tax receipts than to bailouts, though the costs from the latter are not negligible. But the overriding message is more: everyone thinks that they’ve figured out where past bubbles went wrong, but in reality, when countries pull back on financial regulation, they get big booms that end in big booms.
    • 4/5
      It is hard to imagine that anyone with even the slightest awareness of economic issues has failed to notice two things that have occurred over the last several years: (1) governments around the world have been borrowing breathtaking amounts of money and (2) the central banks in those countries have pumped a profligate amount of new currency into the financial system in order to support that borrowing by keeping interest rates low. Whether you think these actions are remarkable or mundane probably comes down to how you would answer the following question: Does debt—particularly sovereign-level borrowing—really matter?Throughout this engaging volume, noted economists Carmen Reinhart and Kenneth Rogoff make a persuasive case that the answer to that question is a resounding “yes”. Further, the authors argue that how a sovereignty borrows (i.e., from foreign investors or from its own citizens) as well as how it chooses to default on its loans (e.g., currency debasement, inflation propagation, restructured borrowing terms) also matter when it comes to the country’s future growth prospects and access to capital markets. As its title suggests, the overall theme of the book is that governments and investors alike keep repeating the mistaken economic policies of the past under the assumption that “this time is different” (e.g., the more sophisticated market structures today allow us to control economic outcomes better than in the past, so we can borrow more without consequence). Using a dizzying array of data tables and charts, Reinhart and Rogoff examine the causes and aftermaths of several hundred years of financial crises and sovereign-level defaults and end up concluding that, in fact, this time is not different in ways that ultimately matter. They finish their analysis with a discussion of the root causes of the recent sub-prime debt crisis, which they term the Second Great Contraction (after the Great Depression of the 1930s). I should note that neither the subject matter nor the expositional style in this book makes for the easiest reading experience. That said, though, the authors do a very nice job in the volume of taking an extraordinary amount of primary academic research—much of it their own—and translating into a more digestible form. There are definitely redundancies throughout the various topics they cover, but Reinhart and Rogoff provide the reader with considerable guidance as to what sections or chapters can be skipped without loss of continuity. Overall, I found this to be a well-executed book with an important message to convey about the current state of global economic affairs.

    Book preview

    The Second Great Contraction - Carmen M. Reinhart

    THE SECOND GREAT

    CONTRACTION

    CARMEN M. REINHART and KENNETH S. ROGOFF

    A PRINCETON SHORTS selection from This Time Is Different

    We've been assured that the recession is over, but the country and the economy continue to feel the effects of the 2008 financial crisis, and people are still searching for answers about what caused it, what it has wrought, and how we can recover. This selection from the best-selling book This Time Is Different—the definitive history of financial crises, including the recent subprime meltdown—answers these questions and more.

    PRINCETON SHORTS are brief, but influential selections drawn from groundbreaking Princeton University Press titles. Produced exclusively in e-book format, they are selected with the firm belief that while the original publication remains an important and enduring work, sometimes we can all benefit from a quick take on a topic worthy of a longer book. For more information and a complete list of books in the series, please visit http://press.princeton.edu/PrincetonShorts.

    PRINCETON UNIVERSITY PRESS

    THE SECOND

    GREAT

    CONTRACTION

    CARMEN M. REINHART

    & KENNETH S. ROGOFF

    A lot of people were convinced that

    this time is different because

    the United States is special. A

    bit more background will help us

    to understand why so many people

    were fooled.

    The Second Great Contraction comprises chapters 13, 14, 15, and 16 from This Time Is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth S. Rogoff, and includes a new note from the authors. Copyright © 2009 by Princeton University Press

    Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW

    press.princeton.edu

    All Rights Reserved

    The Library of Congress has catalogued the cloth edition of this book as follows:

    Reinhart, Carmen M.

    This time is different : eight centuries of financial folly /

    Carmen M. Reinhart, Kenneth S. Rogoff.

    p. cm.

    Includes bibliographical references and index.

    ISBN 978–0-691–14216-6 (hardcover : alk. paper)

    1. Financial crises—Case studies. 2. Fiscal policy—

    Case studies. 3. Business cycles—Case studies.

    I. Rogoff, Kenneth S. II. Title.

    HB3722.R45 2009

    338.5’42—dc22

    2009022616

    British Library Cataloging-in-Publication Data is available

    Princeton Shorts edition, 2011

    eISBN 978–1-400–84112-7

    AUTHORS’ NOTE

    The most recent global financial crisis—which we have termed the Second Great Contraction—is clearly and by far the most severe globally of any financial crisis since the Great Depression of the 1930s. Indeed, according to our index, it is the only post—World War II crisis that meets the definition of a global crisis. Even if the Second Great Contraction does not morph into the Second Great Depression, it was no garden-variety recession by any of our measures. The Second Great Contraction is already marked by severe banking crises in advanced economies and spectacular global exchange rate volatility globally. The synchronicity of the simultaneous collapses in housing markets and employment is unprecedented since the Great Depression.

    Unlike a conventional recession, a Great Contraction is marked by a prolonged period of shrinking credit and housing prices on top of sustained high unemployment and slow growth. It should be apparent to the reader that recent global malaise is much more of a Great Contraction than a Great Recession, as the latter term implies robust growth once the recession is over. In a Great Contraction, the overhang of debt holds back demand and changes both the pace of the recovery and the calculus of policies to cushion and strengthen growth.

    For a free downloadable version of Appendix A.1, Macroeconomic Time Series, used in the complete book This Time Is Different, see http://press.princeton.edu/titles/8973.html. The data on government debt are described separately in Appendix A.2 and the banking crisis dates in Appendix A.3.

    THE U.S. SUBPRIME MELTDOWN AND

    THE SECOND GREAT CONTRACTION

    How relevant are historical benchmarks for assessing the trajectory of a modern global financial crisis? In this part of the book we draw on our historical data set to develop benchmarks for measuring the severity of the crisis in terms of both the run-up to it and the possible evolution of its aftermath. A few years back, many people would have said that improvements in financial engineering and the conduct of monetary policy had done much to tame the business cycle and limit the risk of financial contagion. But the recent global financial crisis has proven them wrong.

    When the subprime financial crisis (as it was initially called) began to unfold in the summer of 2007, a cursory reading of the global financial press would have led one to conclude that the world economy was moving through dark and uncharted waters. Indeed, after events took a decided turn for the worse in the early fall of 2008, much of the commentary took on an apocalyptic tone usually reserved for a threat that could potentially end civilization (as we know it). Yet, had policy makers looked at the recent history of financial crises, they would have found that it provided an important qualitative and quantitative perspective on how to gauge the evolution of the crisis.

    In the next four chapters we will attempt to do exactly that, drawing on past experiences for analogies and making use of our data set to establish quantitative benchmarks. Because many of our readers may want to begin with the most recent crisis, we have done our best to make this part of the book relatively self-contained, reviewing and repeating main themes from earlier chapters as necessary.

    In the first of these chapters, chapter 13, we will begin with an overview of the history of banking crises that is tailored to give the reader a perspective of the current crisis. We will pay particular attention to the debate on the massive global current account imbalances that preceded the crisis and, some would say, helped trigger it. As we will show, the outsized U.S. borrowing from abroad that occurred prior to the crisis (manifested in a sequence of gaping current account and trade balance deficits) was hardly the only warning signal. In fact, the U.S. economy, at the epicenter of the crisis, showed many other signs of being on the brink of a deep financial crisis. Other measures such as asset price inflation, most notably in the real estate sector, rising household leverage, and the slowing output—standard leading indicators of financial crises—all revealed worrisome symptoms. Indeed, from a purely quantitative perspective, the run-up to the U.S. financial crisis showed all the signs of an accident waiting to happen. Of course, the United States was hardly alone in showing classic warning signs of a financial crisis, with Great Britain, Spain, and Ireland, among other countries, experiencing many of the same symptoms.

    In the next chapter, chapter 14, we will extend the comparison between the past crises and the recent one

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