I’ve commented previously on Carmen Reinhart and Ken Rogoff’s great book, This Time is Different: Eight Centuries of Financial Folly, arguing that if financial crises are so common and the world keeps growing anyway, then they must not be so damaging in the long run. I had been meaning to check what the authors themselves thought of this argument, but am only getting around to it now. Here is my email exchange with Carmen Reinhart:
Bill to Carmen: What do you think of the argument that your results suggest that financial crises are really not so enormously damaging in the long run, since you have confirmed they have happened repeatedly in both rich and poor countries alike. Or to put it another way, the US economy in particular has kept reverting to its long run trend path for two centuries despite all the crises you document. All the best, Bill
Carmen to Bill: On the long run effects being non-catastrophic I would tend to agree for most crises.
1. I think I would separate out cases where the crisis led to major policy reversals (epitomized by Argentina–perhaps also Spain in the 1800s)
2. I would also examine the 1930s depression case separately. For many emerging makets it took more than two decades (no exaggeration-there are several cases where it took even longer) to get back to pre crisis GDP levels.
I guess the gigantic question is whether the current crisis fits into either of Carmen’s categories 1 and 2.
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Interesting.
Though using the nomenclature “non-catastrophe” belies a great deal, even if one invokes the “long term.”
Suggests no on the ground perspective, and, dare I write, typical of someone not writing from the ground.
Same perspective which keeps the Fed a good year and a half behind the game in declaring “a recession.”
While I respect the need for empirical data, there is a huge problem waiting the number crunchers to do their thing at the desk while the disaffected suffer.
And of course, this discussion also ignores what might be driving the “off no real consequence” growth …. policies, habits, and the like that may actually have devastating and counter productive “long run” effects …..
Just one lay persons perspective, and probably of no value to this specialized audience.
A second opinion never hurts. When conducting your evaluation of the financial crisis, you might want to look at it from a quasi-outsider’s perspective – in this case Canadian. The book is ‘Black Markets and Business Blues’ by Yvan Allaire and Mihaela Firsirotu. http://www.fipressmontreal.com/Blak_Markets.html
Carmen’s (1) and (2) categories are not necessarily separate: were the delays in recovering from the Depression a result of policy decisions?
World_Bandit: if you want intelligent Fed-bashing (and that is a sport we can all get behind, surely) then it is hard to go past Scott Sumner’s MoneyIllusion blog.
Hayek made a similar argument in his 1929 “Monetary Theory and Trade Cycles.” The booms that cause the crises do a lot of good, and since economies recover and grow afterwards the net seems to be good.
But the crises cause some problems that aggregate data hide. Crises transfer wealth from one group of people, usually the working poor, to another, usually the wealthy. And they erode confidence in free markets, resulting in regulation that slows long term growth. Finally, the real question should be “How much growth have we lost because of crises?”
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