We Think “This Time is Different” — it almost never is (wisdom and warning from Reinhart & Rogoff)

Way back in my graduate school days, I was reading article after article in serious academic journals.  I had great trouble understanding what I was reading.  (Yes, some of my critics would say the same now).  It was the first semester, actually the first couple of weeks, in a brand new discipline.  I had gone from Theology to Rhetoric, and I felt lost.  So I went to see one of my professors, and said – “I’m not getting it.  Any of it.”  Thankfully, he had heard it before, and told me that that was absolutely the common experience.  He said something along these lines:  “Keep reading, and it will just begin to all make sense.”  He was right.  I did, and it did.

I remembered those days, and those feelings, while reading: This Time is Different:  Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff.  I feel a little lost.  It is written by serious economists, and though they are really trying to make it accessible to the non-economists among us, it is filled with charts and graphs and vocabulary that all stand outside my normal reading experience.  But I have the distinct impression that this is an important book.  The premise is clear from the title, “This Time is Different.” They are speaking of the great recent/current economic crisis/meltdown, which they label as “the Second Great Contraction.”  And the meaning is this:  “No, it’s not – this time is not different!”  Here’s a key quote:

This time may seem different, but all too often a deeper look shows it is not.  Encouragingly, history does point to warning signs that policy makers can look at to asses risk – if only they do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, “This time is different.”

In other words, “we” (we = the economists, the decision makers of this era) think that we have put into place wiser and more workable and safer regulations, that we have better understandings, that we have understood the dangers and found better ways to avoid risks, so that we are now in a better position to handle the really big financial challenges.  We are wrong.  “This time is different” thinking is a recipe for disaster.  Again from the book:

The most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that “this time is different.”  It isn’t different this time – it almost never is!

So, here is my current summary of the lessons from the book, which I think are accurately discerned from the book itself (but remember, I’m an outsider to this discipline):

1)  We think we are smarter, wiser, more on top of things, than those who made mistakes in the past.  We are just kidding ourselves.

2)  What got them will get us, and the people who come after us.  When will we ever learn?

3)  When the problem is a banking crisis (and this one largely was), there is no nation immune from the dangers and the consequences for the crisis – neither wealthy nations or poor nations…  and because it hit the United States, it went world-wide…

4)  The problem is systemic, and requires major (government) action to survive the crisis – but that very government action carries its own dangers…