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1 Bob Dillon  Sat, Jun 9, 2012 7:26:01pm

Ah, but we all know that This Time Is Different.

Boom, Bust. Repeat.
Financial meltdowns typically follow real-estate bubbles, rising indebtedness and gaping deficits.

The great 19th-century British journalist Walter Bagehot claimed that during each speculative upturn merchants and bankers “fancy the prosperity they see will last always, that it is only the beginning of a greater prosperity.” A boom in U.S. stocks in the early 1900s was remembered by Alexander Dana Noyes, the financial editor of the New York Times in the 1920s, as “the first of such speculative demonstrations in history which based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedents of finance were obsolete; that things could be done safely to-day which had been dangerous and impossible in the past.” This mode of wishful thinking has continued up to the present day.

Instead of providing salutary warnings, economists have more often played the role of academic shills during each successive New Era. Irving Fisher of Yale, in September 1929, notoriously opined that stocks had reached a “permanently high plateau,” justifying this view with the claim that Prohibition had enhanced worker productivity and that businesses were employing new “scientific” management practices. More recently, just a few short years ago, Federal Reserve Chairman Ben Bernanke and a number of other academic economists hailed the “Great Moderation,” arguing that rising institutional debt levels were tolerable, thanks to better monetary policy and better risk-reducing financial innovations. During the boom years, Mr. Bernanke pronounced that rising house prices were a sign of improved economic fundamentals rather than speculative excess.

It turns out that the Great Moderation was, in fact, a great snare—a time of intemperate borrowing and risk-taking that would eventually destroy wealth rather than create it. Yet we didn’t need to experience the greatest financial crisis since the 1930s to arrive at this conclusion. As Carmen Reinhart and Kenneth Rogoff show in “This Time Is Different,” financial catastrophe is invariably preceded by periods of prosperity and New Era rationalizations.

Messrs. Reinhart and Rogoff have compiled an impressive database, which covers eight centuries of government debt defaults from around the world. They have also collected statistics on inflation rates from every country where information is available and on banking crises and international capital flows over the past couple of centuries. This lengthy historical study gives what they call a “panoramic view” of the unending cycle of boom and bust, showing how claims that “this time is different” are invariably proven wrong.


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