by Jerry O’Driscoll
According to Reinhart and Rogoff, “for the advanced economies during 1800-2008, the picture that emerges is one of serial banking crises.” In This Time is Different, the authors bring us up to the present by examining the history of banking crises. Banking crises are not only frequent , but often accompanied by other kind of crises. These include exchange rate crises, domestic and foreign debt crises and inflation crises. The current financial crisis is still unfolding, but we have already seen the clustering of crises.
They observe that banking crises are often preceded by surges in capital flows. This finding may be controversial, but they detail it at length.
Banking crises are often associated with an asset bubble in housing. They compare the current housing and banking crises to others stretching back to one in Norway during 1898-1905. They devote considerable time to inflationary crises, which are quite common aftermaths both in earlier and more recent history (1500-1799 and 1800-2008).
That brings them to the subprime meltdown and what they term “the Second Great Contraction” (after the great Contraction, 1929-33). It is an excellent and thorough presentation. They note historical studies calling into question the Fed’s policy of “benign neglect” toward the housing bubble under Greenspan and Bernanke.
The history of the aftermath of banking crises is sobering. One salient fact: in the aftermath of 21 banking crises involving a housing boom and bust, real housing prices declined on average 35.5% over 6 years. By that record, we are but halfway through the housing bust. They find that “for banking crises, real housing prices are nearly at the top of the list of reliable indicators” (p. 279). Once again, the Fed’s attitude toward the boom in housing prices is called into question by historical experience.
I recommend this book to all for serious summer reading.