This Time Is Different: Eight Centuries of Financial Folly is a fascinating look at 8 centuries of financial crises including banking, currency and sovereign default.
It’s chock-full of analysis, numbers, tables and charts showing how as much as things change, the scope for financial crises changes very little. The comparison of Developed and Emerging Markets is particularly interesting in that the differences, while they do exist, are far smaller than stereotypical views. Emerging Markets do tend to have more ongoing sovereign defaults, but the frequency of banking crises is little different. Weirdly, some aspects of Emerging Market crises (such as employment impacts) are less than average for the Developed World.
It isn’t really the book’s fault, but this was one of the few books that I struggled with on my kindle – the graphs and charts and captions to figures were particularly difficult to read. Perhaps they would look better on the Kindle DX (the larger model) or even an iPad or something.
Although the book doesn’t focus on the current (still-happening, if you weren’t paying attention) financial crisis, there are several chapters dedicated to it with an analysis of the economic indicators leading up to the crash. Now it’s incredibly easy to predict an event after it’s happened, but I’m still hopeful that the results can be useful in predicting future problems and potentially impacting economic policies and regulations for the better.
Some key conclusions from the book for predictors of financial crises:
- markedly raising asset prices (yes, and in particular house prices given the likely co-factor of increases in debt levels)
- slowing real economic activity
- large current account deficits
- sustained debt build-ups (public and/or private)
- large and sustained capital inflows to a country
- financial sector liberalisation or innovation
That last point was particularly interesting for me – for all the statements that the US economy’s brilliant use of innovation and reduced regulations being a risk mitigant, history suggests this as a cause for the crisis.
For me, what was quite worrying is how well South Africa matches many of these points in the 2000s. It seems that we either got off very lightly, or there is still an extended period of difficulty ahead.
After banking crises, house prices typically decline in real terms by 35.5% and this slump lasts on average 6 years. Now South Africa didn’t have a bank failure, so it may be that we missed the definition of “banking crisis”. However, given the pullback in credit offered along with international banking crises and property market declines, this suggests we’re in for an extended period of property market stagnation.