Semi-Appreciation: This Time Is Different

No queestion but that Carmen Reinhart and Kenneth Rogoff have done themselves proud and made themselves the envy of finance scholars everywhere, putting together what must be the world's most extensive data set on financial crises. So no wonder they are getting rave reviews for their new book, This Time Is Different. Hard to imagine project better positioned to catch the attention of people who read about finance.

And yet I wonder if this is perhaps a book more purchased than read, more read than understood, more tslked about than really assimilated.

Or rather, two books. In the first 192 pages, we have a formidable tour d'horizon of the "Eight Centuries of Financial Folly," as promised by the cover, together with at least an attempt at analysis and summary. It bespeaks a massive amount of original research, together with an energetic effort to understand and assimilate the work of others, and we shouldn't be too distracted by the fact that it's more like six-and-a-half centuries than eight, more like two or three than six-and-a-half. It's an absorbing read, full of tables you can lose yourself in and cool graphs that I suspect are showing up on classroom projectors all over the world. There is also no end of provoking factoids: what is the only modern country to grow itself out of a debt crisis? (Swaziland); what country lost its sovereignty to debt just 80-odd years ago (Newfoundland--you'd forgotten?).

There are also some more interesting general takeaway points; eg: debt/GNP ratios are not the only, nor even the most important, source of sovereign default; "mature" countries may outgrow sovereign default but nobody outgrows banking/financial crises; and banking/financial crises seem to affect "developing" and "developed" countries with virtually equal frequency and severity.

There is also a good deal of meta-discussion of, e.g., how their work differs from others, and what sort of additional information they wish they had (the answer to that one: plenty). Indeed, this topic of "extra information" is one on which I might presume to venture a substantive criticism. They mention in passing that their understanding of inflation is hampered, inter alia, because they can't tell when and to what extent inflation was anticipated. Indeed; and this might be a more general point than they realize. To understand any kind of default, we really need to know whether and to what extent the lender anticipates the possibility that he will lose the value of his loan. If he does so anticipate, it may be that we shouldn't count a particular instance of nonpayment as a "loss" at all--but rather the playing-out of a budgeted contingency.

But let that be. The "second" book within these covers (94 pages) is an account of the current uproar--as R&R brand it, "the U.S. supbrime meltdown and the second great contraction." Material from this part of the book began to surface in the blogs about a year ago if my memory is right, and it got a lot of attention for its stark (and well-documented) message: based on what we (R&R) know, the "great contraction" will last a lot longer and cost a lot more than we have led ourselves to believe.

It's a sobering message and so far, events seem to be playing out pretty much as they predicted they might: the mess is costing a lot, and it looks like it will last long.

You can't argue with them for being right on this one, and you can't fault them for the special quality of rightness that comes through the swinging doors with its pistols loaded. Yet it is the very drama and focus of this "second book" that leads me to a suspicion--namely, that this is a rush operation, hurried out at the behest of their publisher to take advantage of current events. This would explain (a) the somewhat unpolished and incomplete character in the "first" book; and (b) the fatal timeliness of the second, which translates into the sad certainty that it is bound to be out of date in a matter of months or weeks.

I said two books. Actually, there is a third: nearly 100 pages of appendices amplifying just about every topic they have touched on earlier. This is bound to be a treasure trove of grest material, but its very presence adds to the suspicion that there is something undigested about the whole project.

Taking all in all, it is still a good book, based on what has to be recognized as a monument of good scholarship. But you salute the importance of the scholarship while recognizing that it's not as good a book as it might be.