The book on financial crises: 'You need several levels of defense'

By Ezra Klein
Washington Post Staff Writer
Sunday, May 23, 2010


Eight centuries of financial folly

By Carmen M. Reinhart and Kenneth S. Rogoff

Princeton University Press

496 pp. $35

In "This Time Is Different," Carmen M. Reinhart and Kenneth S. Rogoff construct the richest and most detailed history of financial crises that anyone has developed. Their data set covers 66 countries, five continents and centuries, and it gives them an unparalleled ability to see patterns and predictors among different types of crashes. I spoke to Rogoff about the causes, trajectories and solutions to financial crises. This is an excerpt:

So how did having access to all that historical information change the way you understood our financial turmoil?

We had the major charts and tables ahead of the crisis. The key charts in Chapter 13, for instance, were published before the crisis and said the U.S. was at high risk for a crisis based on virtually every available indicator. And the main prediction we made in our work was that deep financial crises are different than typical recessions. It takes longer to recover from a financial crisis. So economists who had just studied the handful of previous U.S. recessions and used those to benchmark everything -- the majority of forecasters -- missed the boat because this kind of recession is different.

Some of your work argues that financial crises often lead to debt crises.

Our database has historical debt data across over 60 countries. This allowed us to look at what happened to debt after other financial crises. And debt explodes, nearly doubling over three years -- which, in turn, can lead to sovereign-debt crises. Some crises occur in the epicenter countries, where the government did everything possible to save the financial sector but couldn't afford it. Sometimes sovereign debt crises happen in peripheral countries hit by volatility and rising risk aversion, like in Greece.

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