Tuesday, June 29, 2010

Book Review: This Time is Different (Carmen Reinhart, Ken Rogoff)

This one ain't for the faint-hearted.  If you are a casual reader of economics, a topical enthusiast who chomps away a little macroeconomics with the morning coffee, a passing-through-bloomberg channel surfer, a lover of Freakonomics, take my word for it - keep away from This Time Is Different.  If, on the other hand, you are a serious student of macroeconomic theory, a policy wonk keen on learning from the lessons of market tragedies past, a historian of money matters - your wettest, wildest dream just came true.

Which probably explains the enthusiasm of Niall Ferguson.  Ferguson of course, wrote the immensely informed (and informative), not to mention entertaining, history of markets The Ascent of Money, which I thoroughly enjoyed and heartily recommended in an earlier book review.  Here is what Niall Ferguson said about This Time is Different -
"This is quite simply the best empirical investigation of financial crises every published."
Niall Ferguson said that.  I didn't need any more to pick up this imposingly dense book.

When someone starts writing a book about financial crises of the past, the one impossibly large shadow you have to deal with is that of Charles Kindleberger.  When Kindleberger wrote Manias, Panics and Crashes, he wrote essentially the definitive book on this subject.  That book became an instant classic, and remains the only book on this theme to have made a serious mark on the common investor or market player.  You cannot write a book on this topic and avoid comparison with him.  So what is the verdict?  Here is mine -

Winner by a unanimous decision, in the Blue corner, ladies and gentlemen - Reinhart and Rogoff!

Here is the thing - Kindleberger, for all his great insights, was not an empirical analyst.  His analysis of past manias and crashes was entirely anecdotal.  Reinhart and Rogoff go in the exactly opposite direction.  Their book is essentially an abstract from one massive dataset they have created.  They don't have much of a story, can't write an exciting paragraph to save their lives, and don't paint a single shocking mental picture over 400 pages.  But here is what they actually do - they put together a dataset of macroeconomic information the likes of which have never been put together in the past.  They gather information about inflation, currency rates, domestic government debt, international debt, government defaults, recessions and the like for over 66 countries, going back (rub your eyes) 800 years!  If you are in a bookstore this week, flip to the appendix of This Time is Different, and skim through the sources of information they have used to put together this dataset.  A more shockingly thorough piece of empirical research is scarcely likely to have been put together by two people.  The more academic of Brick and Rope's readers are probably aware of more books with this kind of depth (are you there, UC Vasi?), but I surely haven't come across one.

Anyone looking at this ocean of data can come up with any number of unique insights pertaining to their own area of interest.  For instance, I was interested in the India angle on many of these (so I am parochial), and here are some interesting nuggets I found:  Did you know, that -
India's share of world GDP in 1913 was 7.5%, and is 4.0% now.  But India is still, just as it was in 1913, number six on the league table of GDP shares.  Some of the countries above have changed (Japan is in, France and UK are out), and the world has grown a bit flatter (top 5 countries now make up 46.6% of global GDP, as opposed to 50.2% in 1913), but India's position in the league table has been unchanged.

India has defaulted on its international debt obligations three times in the twentieth century - 1958, 1969 and 1972.

Since 1800, India has spent 11% of years in some form of default or debt rescheduling.  (There is good company - China has spent 13%, so has Germany.  By the way, the latest 'surprise' sovereign basket case, Greece, has spent 51% of all years since 1800 in some sort or default or restructuring - so why was everyone surprised again?  Probably because they convinced themselves that this time it is different.)
This Time is Different is in many ways, just an illustration of some of the many ways this thoroughly detailed dataset compiled by the authors can be used.  It is less a book, and more a catalogue inviting you to try out this cool new data source. 

There is a thesis to the book, of course.  Which is, quite simply, that whatever be the kind of bubble you might be seeing today, you can rest assured that the market has seen something like this in the past, and that eventually, the bubble will burst.  This time is no different from any other time in the past.  No, housing prices will not continue to rise.  No, the latest technological innovation isn't going to make old ways of valuation irrelevant.  No this crisis isn't so deep and unique that we won't emerge out on the other side.  This has all happened before.  And will happen again too.

But the thesis, and the high level comparison of the latest economic crisis with crises past, are almost sideshows, in the stunning display of the Reinhart and Rogoff's valuable new contribution to the study of markets, their new and comprehensive dataset.  And this new gadget is so shiny that the authors get understandably carried away with it.

Academics will love This Time is Different.  The lay reader will probably not get through the book.  Start reading this great book at your own peril!


  1. Interesting review, yeah one can see why Fergusson likes it. Somehow I am finding it an easier read than "The Lords of Finance" by Liaquat Ahmed which was a 500 page orgy about how depression era central bankers screwed up.

  2. Yes, I'm here and in the post. Yay, ego boost for the day. I'm in the blog guys....

    Nice post Joy. Kepp them coming.


  3. @ Anon - Yes, I agree with you on Lords of Finance. The book was of course on the Best Books list of The Economist and NYT, which usually makes it on my own must read list. But every time I have browsed it in the bookstores, it looks too darn tough going! Not sure I can endure that for 500 pages. So I have never started it in earnest. Good for you!
    @ UC Vasi - Thanks man! Reading is going great guns here, what with the commute! Doing any reading lately?