Deja Vu all over again

One of the most frequent things people said to me in 2008 was that I was surely needing to rewrite my entire money and banking syllabus in light of the financial crisis. I always said that actually I didn't have to rewrite a thing, that nothing that was occurring was any different than things we have seen over and over again. Every time I said this, I was told, sometimes more politely than not, that I didn't know what I was talking about because the events in 2008 were different than anything we had ever seen before. Everyone knew this (well, apparently everyone except me knew this) because all those talking heads on TV said so.

And now comes the first wave of books written after the financial crisis of 2008--I have assigned a bunch of them in my money and banking course. The first one was:

This Time is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff. The title comes from a comment made by an unnamed trader: "More money has been lost because of four words than at the point of a gun. The words are, 'This time is different.'" It turns out that the financial crises for the last 800 years all look pretty much the same--and the events of 2007-2008 are no different. Who knew? Well, everyone who was paying attention knew--all you had to do was spend a little time reading what economists who weren't on TV were saying at the time. But, those economists don't make TV because "Well, actually, there is nothing new in this crisis" is not nearly as compelling TV as "The economy is falling apart and everyone is going to become unemployed and there will soon be people starving in the street and fighting with dogs for food scraps in the trash."

As for the book--it is for serious economic nerds only. The book came out a year too early--the authors have put together a really interesting data set, but rather than spend a year working with it, they rushed a book to print with only a cursory look at the data. Even the cursory look is enough, though, to show how financial crises are both quite common and quite similar to one another.

Last year I assigned another book with the same conclusion but a different approach. Michael Lewis' Panic is just a series of journalistic reports from the last 4 financial crisis--it was uncanny how identical the journalistic reports during, say, the Long-Term Capital Management meltdown sounded exactly like those written in 2007-2008.

The one thing that made the recent crisis different from some of the others in the recent US past was the breakout from the financial crisis to the rest of the economy. We have seen that before too, of course. I suspect, when the story is done being written, we will discover that a large part of the reason the financial crisis spilled out to the rest of the economy was because the crisis was unfolding in an election year, and the candidates (both of them) decided to ramp up the anxiety for political gain. That's speculation at this point, though.

And on a lighter note: Yogi Berra