A crisis with no way out

May 29, 2010
At the height of every capitalist boom, speculators, governments, regulators, journalists and academics spruik that the bonanza

This Time is Different: Eight Centuries of Financial Folly
By Carmen Reinhart & KennethRogoff
Rrinceton University Press, 2009, 496 pages

Review by Barry Healy

Australia has had a lucky escape from the Global Financial Crisis (GFC) our noble leaders and economic pundits tell us.

Not so, says 800 years of economic experience assembled in This Time Is Different: Eight Centuries of Financial Folly.

Carmen Reinhart and Kenneth Rogoff deserve a medal for their research skills in ferreting out details of debt and banking crises, inflation, currency crashes and debasements starting with 12th Century China.

They don’t claim to have captured all the information for their database, merely that covering more than 90% of global GDP for the period. There are more than 100 pages of statistical appendices alone.

Reinhart and Rogoff stick solidly to quantitative and statistical analysis. There is no attempt to provide a historical account of the disasters. They simply lay out all the facts and patterns of different kinds of crisis.

At the height of every capitalist boom, speculators, governments, regulators, journalists and academics spruik that the bonanza will last forever, that this time it will be different — but it never is.

The book’s final two sections are devoted to what they refer to as the “Second Great Contraction” — the US sub-prime debacle that has dragged the world down.

Reinhart and Rogoff show clearly that the GFC warning signs were there for anyone to see well before the crash. Yet capitalist ideologues dreamed up ingenious reasons as to why facts could be disregarded. Some US theorists argued that US foreign assets must have been miscalculated and were actually far larger than official estimates (called “dark matter”) so US debt could go on growing safely.

They present a mass of data showing that the current crisis is a global financial crisis equalled only by that of 1929-32. It is a fundamental event in global economic history that will restructure politics and economics.

The crisis will likely produce deep and a prolonged collapse in housing and other market prices. Steep declines in production are possible and jobs and government debt may explode, not primarily because of the cost of bailouts, but because of collapsing tax revenues.

The effects will be particularly sweeping, they think, because it is truly global. There is no way out for Australia: the Chinese and Indian economies can’t save us. “When a crisis is truly global,” Reinhart and Rogoff write, “exports no longer form a cushion for growth.”

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