“There is a strong family resemblance about misdeeds, and if you have all the details of a thousand at your finger ends, it is odd if you can’t unravel the thousand and first.”
Sherlock Holmes to Dr. John Watson, A Study in Scarlet, and later in the same novel to Inspector Tobias Gregson:
“Read it up. You really should. “There is nothing new under the sun. It has all been done before."
Indeed! It seems all kinds of financial misdeeds have been done before, usually many times. The authors of This Time is Different: Eight Centuries of Financial Folly provide a tremendous service by their efforts in this work. It is still mind-boggling how right Santayana (George the philosopher not the Mexican general of Alamo fame) was when he said “Those who cannot remember the past are condemned to repeat it.” And we have continued repeating some of it for over eight centuries now.
If Sherlock was around today, possibly as the world’s only “consulting detective” in economic or financial misdeeds, he would have loved This Time is Different. The authors Carmen_Reinhart and Kenneth_Rogoff provide exactly what Sherlock recommended in those famous quotes (above). In fact, they analyze a plethora of data on economic and financial “misdeeds.” They lead the reader to the conclusion that what the U.S., and much of the world, has been going through since the mid 2000s is not unique, was not immitigable, and is not over.
The book, symbolically enough published in 2009 on 9/11, while not using much technical economic language, is based on an incredible amount of very well organized data. The book can be read or listened to with or without referring to the data! That’s something of a feat in itself for such a data reliant book! Nonetheless, unless the reader is an economist, an historian of finance or business, or has some similar interest or background, it is probably not your typical summertime reading. Please see paragraphs near the end of this column.
In December, 1996, then Federal Reserve Chairman Alan Greenspan makes his famous Irrational_exuberance remarks. On Friday, March 10, 2000, the “dot com crash” hit as the markets were not quite through another frothing week. Millions of shareholders were not selling just before the top for fear of missing a little more profit. They wound-up selling far below the top for losses or holding and waiting for stock prices to recover. Some eventually did; some still haven’t. The reason for the crash, as usual, was people abruptly stopping buying. This is much like the panic reaction one gets driving along a highway when suddenly and for no apparent reason cars abruptly stop going. The result is a crash. The result in the markets was also a crash.
This was just one of numerous incidents of why Wall Street has and investors generally ignore the old adage “Bulls make money and bears make money. But pigs make nothing.” or the other version “But pigs get slaughtered.”
What happened with housing that started in late 2007 or early 2008 market was similar to the perhaps the most infamous frothing of all...the Dutch Tulip mania of 1637. Approximately 375 years ago, tulips in Holland started temporarily being used as a medium of exchange and kept going up in price. Just before that bubble burst, some tulips—-a single tulip—-sold for over 3,000 guilders, when the average craftsman’s annual pay was approximately 300 Guilders.
For more than eight centuries people-—including those charged with regulating such matters--ignore a most basic question, which can be phrased many different ways but in no case requires a lot of technical training to answer: Does value support the price, or is the price justified by the value. In fact, the authors show that complicated “yes” answers, that is the value supports the high price, is almost always a tip-off the real answer is no.
In our most recent case those who were healthily skeptical were often silenced by the reputedly all-knowing chairman of the Federal Reserve Alan Greenspan^^ and some of his clones. Readers may remember that was when people were granted mortgages even though any reasonable assessment of their finances would have prohibited such loans. These mortgages were bundled together and sold and resold. Greenspan opposed regulating these new presumably superior financial derivatives. (Derivative_(finance) Greenspan had previously noted "Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
There were high premiums attached to the loans (mortgages) of the home owners. Often those premiums would have made it almost impossible for home owners to ever pay back all that was due. This was in exchange for the so-called “low-doc” and “no doc” loans. “Doc” refers to little or no documentation of payback power being required of the borrower. The property itself was the collateral and that kept going up, like the tulip prices, the dot.com stocks, and dozens of other assets around the world during the intervening nearly 375 years.
But, as the authors note, there were warning signs even in 2004. However most officials chose to dismiss or rationalize changes in various debt ratios that were warning of the coming problems three or more years before The Great Recession started in December, 2007. .
One of Greenspan’s very prudent predecessors, William_McChesney_Martin said “The job of The Fed is to take away the punch bowl once the party gets going.” In the same vein, the great Austrian economist Friedrich Hayek said, in essence, the seeds for each economic downturn are sown in the preceding prosperity as it turns from a healthy prosperity into a bubble. That happens as the competition for funds helps inflate the money supply. (Please see http://www.examiner.com/article/hayek-the-road-to-serfdom)
As for the misdeeds of governments, they made mincemeat out of the notion that a gold standard prevents inflation. Monarchs have repeatedly recalled their nations’ coins (currency is a relatively recent development) which when first issued contained a specified amount of (usually) gold or silver as their base of value. The recalled coins were then “debased” by having a certain amount of the gold or silver base removed and given to the monarch. The monarch raised money and the coins were then reformed using filler and given the same value and look as before. Smart subjects just used the coins and pretended they didn’t notice.
Some monarchs borrowed from their wealthier subjects. When payments came due the monarchs had what the authors called one of the earliest forms of debt restructuring. They had their creditors decapitated then collected a very high rate estate tax. In the case of England’s Henry VIII, he had a fund raiser to get needed cash. He ceased and then sold much of the property of the Roman Catholic Church.
More recently, when paper currency was issued, governments could simply inflate their ways out of debt by issuing currency with no backing other than what “faith and credit” may be left in their governments.
Some countries, Greece is an example, have a long history of simply defaulting on their debt. Fortunately Greece is an old country because it typically takes a century or so for a nation's default to not be held against that country.
What will happen to the U.S. and all its debt is one of the questions economists and others continue debating.
The book's basic lesson is that regardless of who says what in regard to these matters THIS TIME IS NOT DIFFERENT.
Today’s column started as a review of This Time is Different. After recently finishing it, this Examiner decided that a summary of the book’s lessons that are applicable today including some related examples, would offer more value to readers. The book is an excellent reference for those interested in economics, finance, or the history of either.
The authors gathered reams of data from 66 countries going back in some cases to the days of Robin Hood. So one obvious question is the comparability of data from earlier times compared to data from the early Twenty-First Century. The authors and their sources make the adjustments as well as possible.
A popular but still requiring thought read on the same subject is by the late Dr. Charles_P._Kindleberger, whose book Manias, Panics, and Crashes: A History of Financial Crises. is cited a few times in This Time is Different.
^^ The authors’ wording suggests Alan Greenspan in his role as Chairman of The Federal Reserve Board, could have taken some actions to significantly mitigate the coming downturn. The phrasing and its context prompted this Examiner to do a little more digging. Readers are referred to the link Alan_Greenspan especially around footnote 15