This Time is Different

Book Description

Critics

• Our Giant Banking Crisis—What to Expect

  John Thys/AFP/Getty Images German Chancellor Angela Merkel, Greek Prime Minister George Papandreou, and French President Nicolas Sarkozy at an EU summit in Brussels, where Greece’s debt crisis dominated discussions about broader economic reform, Febr ... (read full critics)

  nybooks published on Fri, 27 Aug 2010

2 Reviews

• 

  Yes this is good. Sometimes a bit too dry for a non technical audience, but hey, what they say is *really* interesting.

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  Lenz said on Oct 15, 2010 | Add your feedback

• *** This comment contains spoilers! ***

  

  2008 - 2010 seems not different

  I thought the European Community's quarrelling over the required monetary aid for Greece was a good moment to pick up this book. It takes a quantitative outside-in approach to economic shocks, using a relatively limited number of macro-economic data per country per year (economic growth, inflation, ... (continue)

  I thought the European Community's quarrelling over the required monetary aid for Greece was a good moment to pick up this book. It takes a quantitative outside-in approach to economic shocks, using a relatively limited number of macro-economic data per country per year (economic growth, inflation, exchange rate, national debt, etc.). It does not try to describe or explain the mechanics of such shocks, and should be easy enough for an economic layman to understand. The book is very proud of the long record of data it has crunched (it is mentioned ad nauseum, actually), but still mainly looks at the 20th century. It consists of three parts, a historical analysis, an analysis of the current (2007 - 2010) crisis, and some recommendations, which could all be read separately.

  Economic shocks, the book observes, are of all times and of all places, although mature economies seem to have less debt crises than emerging economies. On the other hand, economies with large financial sectors have a larger chance of banking crises. Banking crises are almost a guaranteed consequence of relaxing regulation or financial innovation. The current crisis is a global one, and a deep one.

  In a crisis like the current one, historical analysis predicts that:
  • Equity prices drop about 56%, but recover in averagely 3.5 years
  • House prices drop about 35% and stretch about 6 years;
  • Economic output falls 9% and requires about 2 years to get even to pre-crisis levels
  • Unemployment rises about 7percentage points above the norm, and only improves after nearly 5 years
  • Government debt nearly doubles, rising an average of 86%, and the costs of the increase in national debt far outweigh the costs of saving banks.

  These are only averages; the average Mr. Watanabe has not seen a return to pre-crisis levels since the 1990’s, just like the Great Depression lasted longer in the United States. In many cases, the financial authorities use inflation as a way to reduce (“tax”) their way out of debt. The effect of large-scale crises is worse for emerging markets, because capital flows to such markets is pro-cyclical.

  The book also addresses debt crises. In emerging markets these can happen at any level of national debt. However, national debt is an opaque factor as it requires the inclusion of local debt and liabilities of governments (like guarantees) not found in the national accounts.

  The general conclusion that the man does not seem to learn from past experiences when it comes to financial markets (“this time is different”) is far from revolutionary: you may find it in many observations about stock markets. We may ask ourselves the question why that is such a recurring phenomenon (and in itself a great forecast factor for a coming crisis), even among the professionals of monetary authorities, who don’t have the same incentives for risk taking as bankers or investors.

  So far in much of northern Europe the consequences of the shock are quite benign. You can ask yourself why. To some extend it may have to do with the high amount of Asian savings vis-à-vis the size of their economies: they could almost overextend their stimulus packages, that trickle down across the globe. A better reason might be the quick response of the financial authorities through expansion of the money supply and government expenses. If the latter is the case, this may result in more than average post-contraction inflation and/or government debt.

  Another forecast you might want to make is a coming economic shock in China and Hong Kong, given that house prices are a much better forecast factor than rating agent’s assessments.

  I liked the book, and I am sure I shall read it again when the data mentioned here will announce the next shock. And I am sure it made a little bit better at investing. I wish the book had been around in 2008.

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  Hermes said on Apr 23, 2010 | Add your feedback

Book Details

• Rating:
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• English Books
• Hardcover 496 Pages
• ISBN-10: 0691142165
• ISBN-13: 9780691142166
• Publisher: Princeton University Press
• Pub date: Sep 30, 2009
• Also available as: Others
• In other languages: other languages 繁體書, Libri Italiani

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