Is this crisis really different? No

"This Time Is Different: Eight Centuries of Financial Folly."

"This Time Is Different: Eight Centuries of Financial Folly."

Kenneth Rogoff

Image of This Time Is Different: Eight Centuries of Financial Folly
Author: Carmen M. Reinhart, Kenneth Rogoff
Publisher: Princeton University Press (2011)
Binding: Paperback, 512 pages

Kai Ryssdal: The other day I set up a story by saying that the lasting question of the financial crisis is why. What happened to topple so many big Wall Street banks and bring so many other so close to the edge. Actually, a better lasting question is, why it happened, and why we didn't see it coming because it's not like this is the world's first financial crisis, you know.

Harvard economist Ken Rogoff has a new book out that pretty well answers that question. It's called, "This Time Is Different: Eight Centuries of Financial Folly." Ken, good to have you with us.

Ken Rogoff: A pleasure, thank you.

Ryssdal: So what happened this time? I mean, just to get it to the point that really everybody is worried about in this economy today. What happened that we didn't see this one coming?

Rogoff: Well, we had a lot of the signs of a plain vanilla deep financial crisis. Soaring housing prices, soaring stock prices, all fueled by borrowing, especially borrowing from foreigners. All the red lights were blinking. But people were saying, "No, it's OK. Our central bank is great. We have financial globalization. Everybody loves the United States." And yet, we were going to have a problem.

Ryssdal: Had we paid attention to all those blinking red lights, though. I mean, you say they were out there and we kind of blew right by them. Even if we had stopped to look at them and recognize them for what they were, could we have done anything about it that would have avoided a crisis?

Rogoff: We couldn't necessarily have avoided a crisis, but we didn't have to have a once-in-50-year event. Of course, the government at the time didn't want any kind of recession. But, you know, it's a little bit like having a boiler where you take the release valve away and don't let off any steam, and eventually it blows up.

Ryssdal: There is an implicit arrogance in the title of this book. Not that you guys were arrogant, but the mentality behind it. Everybody is saying, "Oh, no, no, this time it's different."

Rogoff: Well, we think of arrogance and ignorance really as the underlying themes that we see in the past. First, there's ignorance. People think financial crisis happen to other people, at other times, in other places. And of course, they are not very frequent, but they do happen with startling regularity everywhere. And then there's the arrogance; those are the informed people who knew there would be a crisis perhaps someday. They said, "Well, we're doing so well. It's not going to be a problem for us."

Ryssdal: And this goes back to the tulip mania of the 1600s. I mean, this is nothing new.

Rogoff: Well, goodness, our book goes back eight centuries. We start with Edward the III. In 1340, he defaulted to his lenders in Italy, and that started a big financial crisis. These have been going on for a long time, and what's sort of remarkable that we show is the patterns that can give you warning signs when something might happen.

Ryssdal: Yeah, I don't want to sell you short, and you're a very conversational guy, but this book is chock-full of charts, and graphs and figures. It's very academic.

Rogoff: We were aiming to write the definitive book on financial crises that would still be there in 50 years. And when we say a country defaulted on its debt, or had a crisis, we want to be authoritative. For example, a senior official in Japan, in the Ministry of Finance, said, "Our country never defaulted as you say we did in 1942, please fix it." And to make a long story short, we finally sent him back the big, bold headlines from The New York Times, January 1942, saying, "Japan defaults on its debt," and other evidence. And he finally said, "Well, OK, but we only defaulted to our enemies."

Ryssdal: You say you wanted to write the definitive history, so that in 50 years people can pick up your book and learn. Between now and 50 years from now, what are your guesses on the odds that we're going to have another financial crisis?

Rogoff: We will certainly have a big financial crisis again, say, in 50 to 75 years. The question is will we screw up and not fix our system enough so it's only another 10 to 15.

Ryssdal: Is there any chance that the next time a financial crisis rolls around, it really will be different?

Rogoff: Well, you know, they all are different in a way. But what's remarkable are the unifying characteristics, which are, of course, partly built in human nature. Also, with the politicians and regulators, they're not likely to change. And the next one's likely not to be different, either.

Ryssdal: Ken Rogoff is a professor of economics at Harvard University. He is the author with his colleague Carmen Reinhart of a book called "This Time Is Different: Eight Centuries of Financial Folly." Ken, thanks a lot for your time.

Rogoff: Thank you, Kai.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

"This Time Is Different: Eight Centuries of Financial Folly."

Kenneth Rogoff

Image of This Time Is Different: Eight Centuries of Financial Folly
Author: Carmen M. Reinhart, Kenneth Rogoff
Publisher: Princeton University Press (2011)
Binding: Paperback, 512 pages

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